Deutsche Bank’s Revised Outlook on European Software
Deutsche Bank strategists, led by Maximilian Uleer and Johannes Schaller, announced in a research note titled “Semi convinced II” that they are closing their previously‑issued directional “overweight” call on European software stocks. The decision follows a 13% rally in the sector over the past month, which outperformed the broader STOXX 600 index’s 2% rise and contrasted with a 17% decline in tech‑hardware stocks.
The bank now recommends a neutral stance across technology sub‑sectors, citing ongoing artificial‑intelligence disruptions and data‑center capacity constraints that could continue to weigh on sentiment until software vendors provide clearer evidence of future growth. The note also observes that short‑term capital‑expenditure announcements from major tech companies may help European semiconductor shares stabilize after a 17% drop in July, but longer‑term demand uncertainties remain.
Hedge Dynamics and Portfolio Performance
In March, Deutsche Bank had recommended European software as a hedge against semiconductor volatility. An equal‑weighted 50/50 portfolio of European software and semiconductor shares generated a Sharpe ratio of 4.7 from March 10 onward, markedly higher than the 3.8 risk‑adjusted return of a pure semiconductor allocation. After software shares posted the 13% gain, the bank closed its tactical overweight position, and short positioning in European software, which had peaked when the bullish call was issued, has now reverted toward historical averages.
Short‑Interest Unwinding and Outlook for the Next Leg
The report highlights that short interest, measured as a percentage of market capitalisation, has unwound in several prominent software titles, specifically SAP SE, Dassault Systèmes SE, Hexagon AB, The Sage Group plc, Nemetschek SE, and Temenos AG. The analysts conclude that the next leg of upside will need to come from long‑only investors rather than short‑cover‑driven moves.
Valuation Assumptions and Terminal Growth Rates
Deutsche Bank notes that European software valuations still embed overly pessimistic long‑term assumptions. Current market prices imply a terminal growth rate of roughly 2% from 2030 onward for the sector’s incumbents—higher than the flat‑to‑negative rates implied during the February‑March sell‑off but still below what the bank believes the firms can achieve. Implied terminal growth rates vary across stocks, ranging from over 4% for Hexagon AB to about 1.5% for Dassault Systèmes SE, with SAP SE, The Sage Group, Nemetschek SE and Temenos AG positioned in the intermediate range.
Data‑Center Constraints and Hyperscaler Capex
The analysts also flag growing market concerns that major cloud “hyperscalers” may encounter increasing difficulty expanding data‑center capacity because of supply‑chain bottlenecks and waning local political support. Nevertheless, they argue that markets are unlikely to punish hyperscalers for reduced capex, as semiconductor supply remains constrained in the short term—potentially a bit less than before—but the more obvious winner in this environment would be software.