With a recent rally in the Nasdaq and UK technology sector, is this the start of a technology revival?
No sector better exemplifies cyclical extremes than technology, the dot.com area in particular. But with technology prices at rock bottom, should now be the time for investors to place funds in the sector?
Although technology has been one of the worst performing sectors over the last 12 months, more recent figures indicate a much more positive picture. The graph below shows the recent upturn in the Nasdaq and also one of the major US drivers, Microsoft. A similar trend has been seen in the UK technology sector with a rise of some 25% over the past month or so, albeit from a low base. This begs the question of whether or not this is the start of a technology revival.
Any such statement must firstly be tempered with the knowledge that we have recently witnessed a quantum event impacting the world economy. When the events of 11 September unfolded, any hopes that the dot.com sector might recover were severely damaged. Southern New York City will be rebuilt but, with few growth prospects and recession in the US market, volatility is expected to remain high.
Although the rise of technology stocks may be a short-term boost to an industry that has spent much of this year reeling, the benefits are unlikely to be long standing.
Instead, it seems the technology sector is likely to be polarised by recent events. According to Ulric Weil, a technology strategist at Friedman, Billings & Ramsay, an investment firm in Arlington, Virginia, 'the rich (technology firms) will get richer and the poor will get poorer, and may be pushed to the wall'.
Additionally, the consequences of recent events such as the military intervention in Afghanistan are likely to impact consumer confidence and push the US further into recession.
The technology sector has been caught up in this in a way previously not believed possible. Market researcher IDC predicts tech spending will rise by just 3% this year compared to 11.1% last year. Prior to 11 September, their prediction was for 5.6% growth.
This will probably mean many dot.com companies that are relying on intangibles to sustain their futures could struggle. It has been suggested by research team Kinetic Information that as many as 80% of all dot.com companies may not succeed.
This should not be considered an entirely negative trait. Although it does not bode well for the technology investor, natural selection among companies can force the best to come to the top and those least able to compete will fail or be taken over by more successful organisations. This could lead to a stronger, more stable sector.
This is starting to be reflected in the performance of some of the big players. Microsoft, Dell and IBM are all trading at reasonable prices after a twelve-month slide. P/E ratios in the low 20s are similar to P/E ratios for the entire Standard & Poor's 500 ' an unusually low trait for technology companies and just above the 21 P/E ratios seen during the recessions of 1982 and 1991.
Any fund that has a reasonable cash position and a balance sheet that will allow it to trade through the coming months could be in a strong position. An established brand name is likely to further improve this position.
However, a company that has good research facilities and technology but little cash could face tough conditions.
Much will depend on when the major blue-chip companies decide to authorise their IT spend from this year's budget. Even though budgets are allocated in company planning documents, there is no guarantee that orders will be placed until firms perceive an end of recession is in sight. This is not good news for the cashflow projections of cash-poor suppliers.
This has not been helped by previous overspending, fuelled by IT scares. Back in 1999 the fear of Y2K led to massive spending, principally in the USA, but also in the UK and Europe. Despite the perceived threat there was no meltdown in IT systems throughout the globe. The downside was that much of the budget for 2000 was spent in 1999.
In the two years since then technology has moved on and continuing investment into new hardware and systems is likely to continue. Despite this, Microsoft's XP is not expected to have the impact on the pre-Christmas PC market that would normally have been the case and the industry has already factored in shrinkage of 5.6% compared to 2000.
According to the International Data Corporation (IDC), we are unlikely to see positive growth in the PC market until 2002.
Though such figures are rough estimates, analysts say they are gaining more insight into the PC market. Their projections are based on trends they saw after the Gulf War in 1991 and after Desert Storm ' hardware got hit badly, and the PC market worst of all. PCs are most tied to consumer spending and capital investment, and that is what gets hit hardest by uncertainty, according to IDC's John Gantz.
This uncertainty has not been confined to the PC market. In Europe, there has been a continuing shake up in the mobile phone market with many handset manufacturing businesses shedding jobs. Additionally, third generation (3G) sales have not taken off as anticipated.
Despite this, the global market for mobile technology looks far from being saturated. Only 40% of Americans have mobile phones compared to 70% in most European countries. Some analysts have suggested that in times of uncertainty the need to have improved communication becomes increasingly important to consumers, which in turn could fuel future mobile growth.
Other firms that could profit in the current environment are technology security organisations. The number of companies in this sector is comparatively small and until such time as governments, ministries and major transport centres start to invest, the values will remain small. The security area that will probably do particularly well in the immediate short-term is the security software sector. Firms providing firewall, intrusion detecting systems and antivirus software would all be included in this sector.
As an investor, this is not a time for the faint hearted. The technology sector, like all fund sectors, has been dominated by September's events in New York and Washington. While the US economy was looking weak beforehand, it now appears unlikely it will escape recession. T
he disruption will cause many companies ' including those in the technology sector ' to miss third-quarter sales and profit forecasts. This trend could well continue into 2002.
Consumer and business confidence has no doubt been shaken, but the swift actions of the Federal Reserve Bank and other central European and global banks to reduce interest rates and pump liquidity into the world economy will provide support.
After the recent dramatic falls in stock market prices, it is arguable that there has been some over-correction in some areas but that with a disciplined approach coupled with a good understanding of the sector, this may prove to be a good time to buy back in.
However, this must be tempered with a caveat. Clients looking to go into the technology sector should be prepared for a long-term investment. Although the market appears to have bottomed out, there are no guarantees that it will rise.
What is almost certain though is that we are unlikely to see again the meteoric rises and falls that have made technology one of the most volatile, yet exciting, sectors.
Tech spending is predicted to rise by just 3% this year.
Prior to 11 September, predictions were for 5.6% growth.
The situation has not been helped by overspending on technology in recent years, fuelled by IT scares.
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