By Eric Auchard
FRANKFURT (Reuters) – Technology investors seeking refuge after Brexit are picking companies delivering instant access to services for Web and mobile customers or firms mainly doing business globally which can benefit from the pound’s fall. They are shying away from hardware makers or e-commerce suppliers with sizeable UK sales, which count for less after currency swings driven by Britain’s vote to leave the EU.
Shareholders are also wary of software and services firms getting caught short by budget freezes by customers scrambling to reassess their businesses and resulting slowing economic growth.
Second-quarter results begin this week and run into August. The STOXX European technology index fell 10 percent after the June 23 vote, but has since regained 6.6 percent. It is down 10.5 percent so far this year, weighed by slowing global smartphone growth and concerns about the world economy. Brexit is playing into a deeper trend where established tech firms supplying traditional hardware, software or services are losing ground to cloud-based businesses, as corporate spending and consumer appetites shift to the web and mobile phones. “There will be a lot of companies that are poorly positioned for the cloud that are going to call out Brexit as a timely excuse for their own problems,” said Ben Rogoff, a fund manager with Polar Capital in London. “Let’s be clear here: This uncertainty is taking place against a backdrop of growth that has been disappointing anyway. These firms will blame Brexit for their own misexecution”.
A survey of chief information officers in the United States and Europe by Morgan Stanley in June – before the Brexit vote – showed buyers already paring back 2016 spending plans for hardware and technical services. Cloud, big data and security software remain top spending priorities, it found. After the vote, global market research firm Gartner slashed its tech spending outlook for Britain by 3 percent this year and by 5 percent in 2017.
SAFE HAVENS
Two UK-based safe havens are ARM Holdings U.S. names like Salesforce.com Globally focused ASML Similarly, Europe’s biggest software maker, SAP Baader analyst Knut Woller expects SAP later this month to reaffirm its full-year 2016 financial targets: “If SAP can meet the consensus for flat license growth in the second quarter, that would be seen as a relief” and send the stock higher, he said. LEFT VULNERABLE
But UK online advertising and ecommerce sales by other big U.S. Internet names are set to take an eventual hit from slowing economic growth and translating pounds into U.S. dollars for reporting purposes, Deutsche Bank analyst Ross Sandler said. These include eBay Eastern European software services firms EPAM Financial software providers Temenos of Switzerland and UK-based Fidessa may struggle to close contracts in the second half of 2016 as banks reconsider their UK positions, UBS said.
“While we do not think the UK’s ‘leave’ vote is analogous to the Lehman collapse, we do think it is likely to impede decision-making in Europe as banks consider the possible implications,” UBS software analyst Michael Briest said. Dutch car navigation supplier TomTom’s stock has plunged 20 percent in the past month: British consumers account for 13 percent of sales, with three-quarters of overall revenue coming from Europe, Barclays said. “We foresee challenging times ahead for TomTom based on its exposure to the UK consumer market and the negative impact foreign exchange should have on TomTom’s gross margins,” said Barclays analyst Andrew Gardiner. TomTom faces a double hit because most of what it sells is priced in dollars, making purchases more costly in Britain.
(Editing by Ruth Pitchford)