Apart from the usual fallers such as miners and bank, one of the biggest losers so far is Arm.
The chip designer is down 13.1p to 229.1p after analysts at JP Morgan Cazenove reduced their recommendation from neutral to underweight as part of a downbeat note on the semiconductor sector. The bank said a number of factors meant that recent strong order growth for the sector was not likely to continue into the second half of this year.
Weakness in the euro was likely to reduce demand for dollar produced electronics, it said, especially since government cuts could also hit growth prospects. Chinese demand could also fall as the government introduces measures to cool what it sees as an overheating economy.
On top of that, production of TVs has been strong ahead of the World Cup, but this could lead to an excess of stock that subsequently slows demand. And in Germany, a forthcoming cut in the country's solar subsidy could see a drop in orders.
As for Arm specifically, JP Morgan said:
Recent checks in the Asian tech supply chain indicate that besides the slowdown in PC order rates, which has been known for a while, there are now signs of a slowdown in order rates from the handset and set top box markets. Over 60% of Arm's units are from the handset market and thus any slowdown in handset demand will substantially impact Arm's royalty units in the second half of 2010. And royalty unit growth drives Arm earnings and thus the share price. Thus we believe there is reason for caution.
Arm is currently trading at around 25 times 2011 consensus estimates, which is near the historical peak valuation for the stock. Given that we are probably near the peak of the cycle, we believe that a peak valuation multiple for the stock is unwarranted.
