Deutsche Bank strategists have closed their overweight call on European software stocks after a 13% rally in the sector, shifting to a neutral stance across technology sub-sectors. The bank says short positioning has normalized and valuations still underappreciate software vendors' ability to adapt, even as AI shifts and data center constraints reshape the outlook.
Deutsche Bank strategists have closed their directional "overweight" call on European software stocks following a 13% rally in the sector, advising investors to adopt a neutral stance across technology sub-sectors. A strategy team led by Maximilian Uleer and Johannes Schaller published the shift last week in a note titled "Semi convinced II."
A hedge that outperformed
The bank had originally recommended adding European software stocks in March as a portfolio hedge against semiconductor volatility. An equal-weighted 50/50 portfolio of software and semiconductor shares delivered a Sharpe ratio of 4.7 since March 10, beating the 3.8 risk-adjusted return of a pure semiconductor allocation. Software shares then gained 13% over the past month, outperforming the STOXX 600's 2% rise and a 17% decline in tech hardware, which pushed the bank to close its tactical overweight.
Short sellers retreat
Short positioning in European software, which had reached near-peak levels when Deutsche Bank turned bullish in March, has since normalized back toward historical averages. The note pointed to SAP, Dassault Systemes, Hexagon, Sage Group, Nemetschek, and Temenos as names where short interest has unwound most.
According to Deutsche Bank strategists: "the smartest way might be to stay neutral on the sector", noting semiconductors have driven both index performance and volatility this year. The report added that the next leg of gains would need to come from long-only investors, cautioning that the shift toward autonomous AI agents may keep weighing on sentiment until vendors show clearer growth evidence.
Valuations still cautious
Current market prices imply a terminal growth rate of roughly 2% from 2030 onward for European software incumbents, up from the flat-to-negative rate implied during the February and March sell-off. Deutsche Bank says the sector's valuation still underappreciates established vendors' ability to adapt. Implied terminal growth rates range from over 4% for Hexagon down to about 1.5% for Dassault Systemes, with SAP, Sage Group, Nemetschek, and Temenos clustered in between.
Data center bottlenecks favor software
The report also cited growing concerns that cloud hyperscalers may face increasing difficulty building new data centers because of supply chain bottlenecks and waning local political support. Deutsche Bank strategists said markets are unlikely to punish hyperscalers for lower capital spending. With chip supply still constrained, they said software would be the more obvious winner between the two sub-sectors.
Source: Investing.com
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