London - It's not banking or mining
shares, but rather technology stocks, that have come up trumps
in Europe this year and are poised to end the first quarter as
the best-performing sector.
European tech companies often pale in comparison to the
glamour of peers across the pond such as Facebook, Snap
Inc and Amazon, and 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 have risen nearly 12 percent
in the first quarter, outstripping the broader market,
which is up 4.8 percent, and also their performance in the first
three months of last year when they fell 5.4 percent.
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.
Tech stocks lead way in Europe. Graphic: Reuters
"Every consumer is exposed to Google, or Facebook, or
Twitter ... 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 percent, followed by oil stocks
which rose 22.9 percent - far ahead of technology firm shares
which were up 3.4 percent.
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 percent to the end of the year.
These trends were expected to continue into 2017, but so far
banks are only up 4.6 percent in the first quarter, miners are
up 6.2 percent and oil stocks are down more than 3 percent.
Read also: Snap shares plummet after debut
Like many sectors, the commodities and financial industries
have since last week been hit by investor concerns that U.S.
President Donald Trump may not be able to deliver on all his tax
and infrastructure pledges, after his healthcare plans were
blocked.
Tech is less exposed to immediate political and economic
developments, according to analysts, and are 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," said
Steve Sherman, senior portfolio manager at BNP Paribas.
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
last week 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 towards digitization across industries has market
participants particularly excited.
Morgan Stanley analysts highlighted SAP's S/4 HANA
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, STMicroelectronics and ASML
are closely linked to Apple and the iPhone
cycle. Infineon shares have surged to a record high.
US vs European tech sectors. Graphic: Reuters
Stuart Mitchell, manager of the SWMC European Fund at S.W.
Mitchell, is betting big on STMicro. The stock, up 33 percent
this year, is the fund's biggest holding.
Mitchell said that 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 reckons STMicro's role in the auto industry with its car
chip business and time of flight (TOF) technology - which is
used in sensors - means it will surprise with its quick growth.
Neil Campling, global head of TMT Research at Northern Trust
Capital Markets, said he expected 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.