By Peter Keysel, fund manager at Govett Investments The environment for European technology shar...
By Peter Keysel, fund manager at Govett Investments
The environment for European technology shares has worsened along with the deteriorating macroeconomic situation and evidence of a reduction in capital spending programmes in both the US and Europe. As a result, growth estimates have been revised downwards.
This economic picture was made worse last year by slower business and self-inflicted damage within the technology sector. This included the increasing inability of telecommunication companies to pay for the exceptionally high costs of third-generation mobile licences.
These companies tried to raise the money to pay for the licences on the open market ' but were left with highly-geared balance sheets and falling share prices as investors took fright at these corporate management excesses.
Demand expectations for telecom industries have continued to decline on the back of reduced rate of mobile utilisation and a lack of confidence in the forecasts for data transmission growth.
Demand expectations have correspondingly fallen for telecoms equipment suppliers, the semiconductor industry and component manufacturers.
The terrible events of 11 September 2001 caused a further, significant downward move for share prices but also marked the start of a recovery. Share prices recovered towards the end of the year and technology shares, in particular, stabilised and then rose sharply.
Although the very short-term outlook continues to be dominated by uncertainties, such as the shape and extent of economic growth and corporate news as well as by the global economic and political news as we enter the new year, the market background is becoming more positive. There is real belief that the sharp and sustained cuts in interest rates in the US and Europe will have positive impacts.
There is now a strong view that a short recession will be followed by positive economic growth in Europe at the end of this year.
Recovery should be aided by relatively easy monetary policy and increasing liquidity in financial markets. In this environment, many investors should be focusing on economically-sensitive sectors, such as technology.
On the basis that stock markets discount the resumption of economic growth and corporate profits many months in advance, we could soon see the first positive phase in better technology share prices.
The traditional perception is that US technology companies are superior to their European competitors. The reality is that European technology companies have secured global leadership positions in many fields of technology, including mobile telecommunications.
Nokia is the global leader in the manufacturing of handsets and European suppliers, including companies such as Ericsson and Siemens have the global lead in the manufacture, supply and infrastructure of new generation mobile telephones and associated technology.
We therefore believe European technology companies are well placed to benefit from the likely improvement in economic and corporate prospects.
Investors are aware that individual stocks and sectors within technology are very volatile. Diversification of a portfolio across a wide range of technology sectors can reduce the risks, while still generating significant upside potential.
Rising economic growth.
Increasing global liquidity.
Inflation driving search for increased efficiencies.
Shadow of recession still looms.
Continued high corporate debts.
Overhang of weak corporate governance.
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