By Alan Torry, fund manager at SGAM The US economy is coming back to life ' and at a much faster...
By Alan Torry, fund manager at SGAM
The US economy is coming back to life ' and at a much faster pace than most would have imagined just three months ago. How soon before this feeds through to the technology market?
The answer is mixed. Investors tend to want immediate gratification and yet every economic cycle goes through several distinct stages. Initially driven by a pick-up in consumer demand and restocking, it is only after nine months or so that companies begin to raise their capital spending. We are in this gestation period now. Investors are wondering whether the tech recovery will ever come, so it is important to see if anything is different this time.
First, looking at US consumers, it is clear that they are in a strong condition, with income boosted by lowered taxes, reduced mortgage rates and cheaper energy ' all good but perhaps less of a driving force than normal because they really have not gone through the normal belt tightening recession. Nevertheless, sales of flat screens and DVD players and even some PCs are booming.
Turning to the inventory cycle, we see a much stronger rebound than normal ' not because manufacturers need to raise inventories by a major amount but because merely ending the sharpest period of destocking for nearly 20 years will breath life back into the economy.
So the pick-up in consumer spending and a reversal from the precipitous decline in inventories are behind the expectation of 4-5% GDP growth in the first quarter. But the real growth in technology will depend on the corporate buyer kicking in later in the year. Here the signals are mixed. We know that the telecom operators are still slashing their spending ' the latest estimates indicate 2002 spending in the US could be 25% below the already reduced rate in 2001.
In part, this is because of the ferocious build out of capacity in 1999 and 2000 has left the industry with large areas of excess capacity ' a problem compounded by the bankruptcy of so many of the new age carriers and the weakened financial condition of others. In time this excess capacity will all be absorbed but for the present it is an area to avoid.
Other areas are much brighter' semiconductor dem-and has picked up, in part from restocking, but also from the new consumer products we have mentioned. Software, where it offers a rapid payback, is also back in demand.
More generally, in talking to a number of companies recently, we detect an improvement in the number of sales enquiries. SAP, a leading business software company recently went one stage further and noted that its first quarter had started strongly in the US. Europe is lagging this uptick but that is simply due, in our mind, to the delayed economic recovery here.
But focusing on the shorter term we are yet again coming into quarterly earnings season. As I write, we have had fewer than normal pre-result warnings and those that have occurred have been biased towards the troubled telecom sector. So, with luck, the season will go well but no one should expect much optimism on the April post-result conference calls.
US economy recovering.
Inventories being rebuilt.
Early signs of orders.
Consumer recovery modest.
Telecom spending weak.
Corporate spending mixed.
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