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European tech stocks slump as valuations cast cloud over cyclical rally
June 12, 2017 / 11:44 AM / 6 months ago

European tech stocks slump as valuations cast cloud over cyclical rally

LONDON, June 12 (Reuters) - The sharpest selloff in European technology stocks since the aftermath of last year’s Brexit referendum has underscored investors’ concerns about rich valuations across sectors in markets most sensitive to economic growth.

Europe’s tech stocks fell 3.5 percent, knocked by a similar slide on Wall Street on Friday. Apple shares, a bellwether for the sector, were down more than 2 percent in U.S. pre-market trading on Monday, suggesting more weakness ahead.

Chipmakers, which supply to Apple and other smartphone companies, bore the brunt of the selloff in Europe. Shares of STMicro fell 8 percent while Dialog Semi slumped more than 5 percent.

Brokers including Morgan Stanley, Credit Suisse and JP Morgan have stepped up warnings in recent weeks on how much further the rally in cyclical stocks -- or those most geared to economic growth, such as banks, industrials and technology -- has to run.

Morgan Stanley downgraded its view on the European tech sector to “underweight” last week citing valuations, while Goldman Sachs published a similarly cautious view on U.S. tech stocks last Friday.

The selloff, which began in earnest on Wall Street, where shares of Amazon, Facebook and Alphabet along with Apple took a hammering on Friday, has spread to Asia and Europe sparking fears of broader market weakness.

“This is the nature of the tech sector. Valuations do from time to time become very stretched and they come back and anyone who has paid a very high valuation might experience some short-term pain,” said Fergus Shaw, fund manager at Cerno Capital.

In Europe, the regional tech index was up 24 percent before Monday’s slide and finished last week at its highest level in 15 years, easily outpacing other sectors.

Those gains have lifted stock valuations to their highest since 2004.

At 21 times forward earnings, they remain well short of the dizzying heights reached during the dotcom boom and bust when valuations hit more than 70 times.

But the ensuing crash still haunts investors in the sector.

With the year’s best performing sector off sharply there are worries that weakness could spread to other economically sensitive stocks where resurgent investor interest has also pushed up valuations.

Morgan Stanley strategists said last week that cyclical stocks’ weighting in the MSCI Europe index was at a 20-year high, and a couple of percentage points of their tech-bubble peak.

They recommended investors switch into dividend-paying sectors such as real estate and telecoms which have been out of favour so far this year.

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