SECTOR SNAPSHOT: EUROPEAN TECHNOLOGY
- The technology sector is facing some serious cyclical headwinds in an ongoing structural bull market. European and American lawmakers are showing strong interest in tightening regulations within certain industries. Privacy and security issues play a major role in the ongoing debate. Governments are also looking for innovative ways (sales tax) to impose more taxes on companies with broad global online exposure. Finally, Trumponomics is eyeing Chinese technology companies looking for ways to punish them for so called unfair trade practices. This could definitely unlock further fears and tensions in the global hot technology sector.
- Globally, the technology sector is still showing positive momentum signals on an absolute and relative basis (Fig 1 & 2). European semiconductors are performing strongly and hardware is even showing signs of price stabilization. Only the Software & Internet industry is starting show potential signs of price reversals. (Fig. 3)
- Analysts seem to be quite neutral on de the sector with an average 12-month 10% return target for the MSCI Europe Technology Index. Sentiment is not at extremes and hence does not provide us currently with any valuable signals. (Fig. 4)
- European OECD Leading Indicators are showing signs of ‘growth slowing’ but emerging OECD indicators are not showing a lot of weakness yet. The relative performance of the technology index does not how any strong correlation with the OECD cycle but has more positive correlation with interest rate moves. Hence, we would define a global rising interest rate environment as a negative on average for the sector. However, ‘growth slowing’ could currently depress rate levels again for a while. (Fig. 5)
- In Europe, the last five years have been characterized by very modest sales growth (1%) but strong EPS growth (11%). American technology companies have posted stronger sales growth (5,5 %) but the same EPS growth (11,4 %). For the next three years, consensus outlook looks quite optimistic with expected annualized sales and eps numbers of respectively 5% and 14,5% for the US versus 6% and 20% for European tech companies. This might well prove to be too confident given the expected headwinds combined with high sector valuations. (Fig. 7)
- The forward dividend yield has dropped to 1,6%. This yield normally trades at around 50% of the market dividend yield (3,8%). The current yield discount doesn’t point to an attractive entry point from a yield persepective. (Fig. 8).
- The MSCI European Technology sector is trading rich to very rich, both on an absolute basis (versus history) as on a relative basis (historically versus market). Some valuation multiples are trading more than 2 standard deviation from the average which point to very high valuations. (Fig. 9 & 10)
- As long as the sector can deliver and/or beat expected high EPS-growth, valuations could be sustained. We have some doubts however given the expected headwinds, higher interest rate environments, tensed geopolitics, more regulation and slowing macro. A cyclical setback at this very moment would be no surprise to. However, we do expect the structural bull drivers to come back roaring in the sector after some pause.
Figure 1: TECHNICAL: MSCI EUROPE TECHNOLOGY SECTOR: ABSOLUTE PRICE, RELATIVE PRICE RATIO & MARKET BREADTH
Figure 2: TECHNICALS: MSCI GLOBAL TECHNOLOGY SECTORS: RELATIVE PRICE VERSUS MARKET
Figure 3: TECHNICAL: MSCI EUROPE TECHNOLOGY SUB SECTORS: ABSOLUTE & RELATIVE PRICE
Figure 4: SENTIMENT : MSCI EUROPE TECHNOLOGY: Consensus Analyst 12-month target sector return
Figure 5: MACRO: MSCI EUROPE TECHNOLOGY & MACRO VARIABLES: 10Y BUND YIELD & OECD EUROPEAN LEADING INDICATOR
Figure 6: FUNDAMENTALS: MSCI EUROPE TECHNOLOGY: SALES & EPS PER SHARE (absolute & relative versus market)
Figure 7: FUNDAMENTALS: MSCI EUROPE TECHNOLOGY: OPERATING MARGINS & DEBT
Figure 8: DIVIDEND: MSCI EUROPE TECHNOLOGY: DIVIDEND YIELD (absolute & relative versus market)
Figure 9: VALUATION : MSCI EUROPE TECHNOLOGY: ABSOLUTE VALUATION (valuation multiples versus historic average)
Figure 10: VALUATION : MSCI EUROPE TECHNOLOGY: RELATIVE VALUATION (relative valuation multiples versus historic average)