Tech Sector Update
On Thursday, US stocks saw an increase as technology-related shares continued their strong performance. The S&P 500 technology index rose to give the S&P 500 its biggest boost. The technology sector was up around 20% for the first quarter, leading sector gains alongside communication services.
The technology sector has continued to lead the way in the US and Asian markets, with strong gains reported in Q1 2023. However, concerns have been raised about the frenzied buying of shares in some companies in China’s technology, media, and telecom sector, potentially distorting markets and creating wider risks. Analysts have cautioned that many of these Chinese companies lack the strong fundamentals required to support their soaring share prices. In Europe, Airbus has decided not to acquire a stake in the soon-to-be spin-off division of Atos, Evidian. Instead, the planemaker remains interested in partnering with Atos, which is undergoing a split-up plan following a governance crisis and heavy losses. This highlights the importance of strategic partnerships in the technology sector.
In this article, we shall look at some of the factors affecting the tech sector.
China AI Sector Distorting Markets
Investors in China are piling into technology, media, and telecom (TMT) shares, betting on the development of chatbots, which they believe can revolutionize the sector, cut costs, and create new growth paths. On some days, Telecom TMT stocks have made up over 40% of total market trade, which, according to China Merchants Securities, is a record concentration of trading volume. Funds and exchange-traded funds (ETFs) focusing on TMT have seen significant inflows in recent months, among the largest of any sector, according to data compiled by Cinda Securities.
However, analysts are concerned that this frenzied buying could be distorting markets and creating wider risks. Many of the companies whose shares have seen significant price increases do not appear to be supported by strong fundamentals. Beijing Haitian Ruisheng Science Technology, whose shares have quadrupled, has warned investors it does not see substantial order growth from artificial intelligence-generated content. Similarly, chipmaker Cambricon Technology’s share price has tripled, despite the company reporting losses since 2017. Analysts are concerned that as broader market gains falter and doubts swirl over China’s recovery from the pandemic, this frenzy could suck up enough money to pose wider risks. However, some investors remain optimistic that the Chinese government’s support for technology development will eventually lead to the emergence of real industry leaders.
Airbus Rethinks Evidian investment
Airbus has decided against the acquisition of a 29.9% stake in Evidian, a soon-to-be spun-off division of French IT firm Atos. The world’s largest planemaker said the purchase did not meet its objectives, though it remains interested in a partnership with Atos. Evidian, which includes Atos’ cybersecurity division and supercomputers, was seen as an attractive prospect by Airbus because of the growing importance of big data, connectivity, and high-power computing in aerospace. Atos, which is undergoing a split-up plan following a governance crisis, heavy losses, and sharp stock price swings, would have gained much-needed investment through the sale. Its shares plunged more than 16% after the news. Atos values Evidian at around 7.6 billion dollars, including a 3 billion euro debt.
A 29.9% stake would have cost 1.2 billion euros. Rival onepoint and UK private equity fund ICG had made an unsolicited offer for Atos of 4.2 billion euros in September, but this was rejected. Onepoint Chairman David Layani said the firm was “totally mobilized” and studying options for an acquisition of Evidian.
Investor’s Note
The technology sector continues to be a leading performer in the US and Asian markets, with strong gains being reported for the first quarter of 2023. However, concerns have been raised about the frenzied buying of shares in some companies in China’s telecom sector, which could be distorting markets and creating wider risks. Analysts warn that many of these companies do not have strong fundamentals to support their soaring share prices, leading to fears that the frenzy could suck up enough money to pose wider risks.
Meanwhile, Atos is undergoing a split-up plan following a governance crisis and heavy losses, and the sale of Evidian would have provided much-needed investment for the firm. However, Atos shares plunged more than 16% after the news, highlighting the importance of strategic partnerships in the technology sector.
In contrast, Alibaba Group announced plans to split into six business units and explore fundraising or listings for most of them, marking the biggest restructuring in its 24-year history. The move was well-received by investors, with Hong Kong-listed shares rising by well over 10%. This demonstrates the importance of companies adapting and restructuring in response to changing market conditions and regulatory pressures. As the technology sector continues to evolve and grow, companies that can effectively navigate these challenges and opportunities are likely to be the most successful.