The European tech sector now contains some good buying opportunities after the 'correction' in recent days, says Deutsche Bank, based on more attractive valuations and an expectation of improved earnings in the second half of the year.
Taking in the sell-off on Tuesday, the Euro STOXX 600 Tech subsector is down 14% since the beginning of July, underperforming the broader STOXX 600 by 9% during the same period, which accounts for over a quarter of the downturn in the broader European equity market, multi-asset strategists at the bank said.
"We see three reasons why the tech underperformance should come to a halt from here," said strategist Maximilian Uleer, with one of his key arguments being that as weak quarter-on-quarter tech earnings growth in the first half "should return to above market growth" in the second.
After the stock market moves in recent days, tech price/earnings ratios have returned to their long-term range, he added, with the 11% premium seen to the 10-year average seen in the spring having "entirely vanished" over the past weeks.
The strategist noted that the "often-proclaimed inverse correlation of tech and rates has proven wrong" in the past few weeks, with the 10-year German Bund yield declining by 31 basis points since the start of July, while the tech sector "has not benefitted from lower rates levels at all".
"That said, we do not believe that the negative correlation of rates and tech has vanished entirely.
"If Bund yields drop below 2%, we expect the correlation of tech and rates to turn from positive to negative again, as has been the case during previous cycles of lower interest rates."
The Deutsche Bank multi-asset team upgraded its rating on tech to 'neutral', seeing current valuations as "fair" and earnings estimates as "more realistic", though they are still cautious about the potential for further earnings downgrades as 2025 earnings growth forecasts are still elevated.
They recommend client be "selective", with favourite tech stocks in being Dutch semiconductor equipment giant ASML (NASDAQ:ASML), SAP and Capgemini, where analyst colleagues see around 50% upside for ASML, 20% for SAP and 40% for Capgemini.