Investors bet on a quiet tech revolution in Europe
LONDON (Reuters) – It’s not banking or mining shares, but rather technology stocks, that have come up trumps in Europe this year and ended the first quarter as the best-performing sector.
European tech companies often pale in comparison to the glamor of peers across the pond such as Facebook, Snap Inc. and Amazon, and they are dwarfed in terms of market value. The US sector, at $4.3 trillion, is worth more than eight times Europe’s.
Investors, however, have been quietly buying into a European industry they see as being at the heart of disruptive digital developments across a slew of sectors.
Tech stocks in Europe rose nearly 12% in the first quarter, outstripping the broader market, which was up 4.8%, and also their performance in the first three months of last year, when they fell 5.4%.
Driverless cars, iris-scanning technology and augmented reality are just a handful of the themes at play globally in which European companies such as STMicroelectronics, Infineon Technologies and SAP are involved.
Many European software firms are involved in corporate back offices, keeping systems efficient and running – a less headline-grabbing side of the tech sector but one that can be important for companies across all industries looking to cut costs.
“Every consumer is exposed to Google, or Facebook or Twitter, [but] something like SAP, which actually is in most corporations, is less visible to the end consumer,” said Marcus Morris-Eyton, European equities portfolio manager at Allianz Global Investors. Tech now accounts for nearly a quarter of Morris-Eyton’s portfolio, and SAP is his biggest position.
AUTOMATION
The mining sector was the standout performer in Europe over the course of 2016, gaining 61.9%, followed by oil stocks, which rose 22.9% – far ahead of technology firms’ shares, which were up 3.4%.
Banking stocks endured a turbulent first half, dragged down by problems in the Italian sector. But after hitting a low in July, they rallied almost 47% to the end of the year.
These trends were expected to continue into 2017, but so far, banks are only up 4.6% in the first quarter, miners are up 6.2%, and oil stocks are down more than 3%.
Like many sectors, the commodities and financial industries recently have been hit by investor concerns that US President Donald Trump may not be able to deliver on all his tax and infrastructure pledges after his health-care plans were blocked.
Tech is less exposed to immediate political and economic developments, according to analysts, and is more governed by long-term global trends in technologies such as automation, driverless cars and augmented reality.
“[In tech], there’s always this level of innovation that keeps people engaged and keeps people investing for those opportunities almost irrespective of the economic cycle,” BNP Paribas senior portfolio manager Steve Sherman said.
Flows into tech have been strong globally, with tech-sector-focused funds seeing the biggest inflows year-to-date since 2009, according to data from Bank of America Merrill Lynch.
Likewise, Europe-listed robotics-and-automation exchange-traded fund (ETF) ROBO hit a new record high two weeks ago and saw record monthly inflows in February of $80.6 million. ABB and Krones are among its top 10 holdings.
TIME OF FLIGHT
The move toward digitization across industries has market participants particularly excited.
Morgan Stanley analysts highlighted SAP’s enterprise cloud software, which helps integrate data and applications, and also its new product line for the Internet of Things (IOT), where everyday objects are connected to networks to send and receive data.
At Evenlode, one of Britain’s best-performing investment funds last year, portfolio manager Hugh Yarrow holds stocks such as Sage and Relx, whose digital analytics are being increasingly used in law, accountancy and finance.
In more traditional sectors of tech, chip makers such as Infineon, ST Micro electronics and ASML are closely linked to Apple and the iPhone cycle. Infineon shares have surged to a record high.
Stuart Mitchell, manager of the SWMC European Fund at S.W. Mitchell, is betting big on STMicro. The stock is up 33% this year and is the fund’s biggest holding.
Mitchell said he became interested in the stock when its share price fell after its loss-making set-top boxes business went belly-up last year.
He believes STMicro’s role in the auto industry with its carchip business and time-of-flight (TOF) technology, which is used in sensors, means it will surprise with its quick growth.
Northern Trust Capital Markets global head of TMT (technology, media and telecommunications) research Neil Campling said he expects opportunities in areas such as semiconductors, automated vehicles, sensors and virtual and augmented reality.
“The tech industry in Europe may not be as big in terms of revenue... as the US is, but it has a critical role to play in basically what is, without doubt, a digital revolution that is global in nature,” he said.