By Eamon Quinn
The slump in IT stocks in recent weeks could herald a slowdown in the US economy next year, a consultancy has warned.
Capital Economics in London said it is easy to forget that IT stocks usually fall hard when an economy slows. “While the threats of regulation and protectionism have weighed on the IT sector of the S&P 500 over the past couple of weeks, the prospects for the US economy also pose a significant threat in our view,” said the consultancy.
“Amid all the concern about regulation and protectionism, though, it is easy to lose sight of the fact that the IT sector is also sensitive to the economic cycle. This is a benefit when the good times roll,” it said.
Capital Economics said IT shares fell further than most in the US market corrections in three previous US recessions. “The valuation of the IT sector today is nowhere near as high as it was during the dotcom bubble, so it is unlikely to under-perform as dramatically when the economy turns. What’s more, we are not explicitly forecasting a recession in the US.
“Nonetheless, we are anticipating that the US economy will start to slow significantly next year. If so, a deteriorating business climate may add to the problems facing the IT sector,” it warned.
European and US stocks rose yesterday as markets moved toward the end of a tumultuous quarter on a slightly higher note. Gains in the S&P 500 Index in the US were led by transportation companies and technology shares, including Facebook, even as Amazon.com slumped after US president Donald Trump in a tweet accused the company of not paying its taxes. However, the reversal of recent weeks which were led by data privacy concerns over Facebook have put investors in stock markets on the defensive and boosted the worth of so-called defensive stocks.
In Ireland, CRH, a ‘cyclical stock’ which should do well when markets are rising on economic growth and spending prospects, also gained slightly yesterday but is 15% down in the past year. The building products company is valued at €23.2bn. Equity investors looking for protection from tech-led share reversals, trade wars, as well as Europe’s slowing economic momentum may find that the “defensive” sectors they usually seek out during market storms are no longer the safe havens they once were.
Earnings of telecom, consumer staples and healthcare companies and utilities tend to hold up when macro indicators turn south, but many of these now face disruptive or competitive forces that threaten their traditionally robust income streams.
“‘Defensive value’ stocks have become a very small niche this cycle. Those that appear defensive and not aggressively priced typically have some structural or regulatory issues,” said Paul Harper, equity strategist at DNB in Oslo. Big European telecom firms, for instance, are struggling to get hoped-for returns from their investments in broadband and mobile infrastructure as smaller rivals nip at their heels with simple, cheap data plans.
And competition rules and the lack of a unified European telecom market are making defensive mergers hard to pull off. Utilities face similar challenges and are also grappling with weak wholesale energy prices, an increasingly redundant model of centralised power generation.
- Additional reporting Bloomberg and Reuters