The technology sector has enjoyed a good start to the New Year, continuing its upward trend since th...
The technology sector has enjoyed a good start to the New Year, continuing its upward trend since the Nasdaq hit a 52-week low of 1,108 on 10 October 2002. The index has climbed by more than 20% since, fuelling optimism the worst is over.
Several factors account for the bounce. In September each year, mutual funds are forced to book losses with the taxman. This results in fund managers offloading stocks but once this end-of-year tax selling is over, buyers come back into the market.
Investors also look to realign portfolios towards the end of the year to boost performance. This would have led many to raise their beta positions, a move that would have benefited technology stocks. Hedge funds that had been shorting technology stocks in the expectation of continuing price falls subsequently rushed to close such short positions.
However, there is still no hard evidence the current rallies can be sustained over the coming months. Confidence plays a huge part in how technology performs and it is noticeable company forecasts are more conservative than in the past. By setting themselves low hurdles, it is more likely they will hit their targets, a move that could bolster confidence in the sector.
Valuations across the sector are not exceptionally cheap. The hope of a recovery has been priced in but they still look reasonable on a three-to-five-year view. There are a number of large, well-known companies such as Microsoft in pole position in their chosen field and with decent balance sheets.
The wireless telecom operators including Vodafone and KPN have done particularly well of late. I have doubled my weighting in Vodafone since October. Mobile phone operators are refocusing by weeding out the less profitable segments of their business. Customers are being encouraged to switch from pay-as-you-go to monthly billing. You do not see as many handsets on offer for £15 and today a standard handset is more likely to cost you £50.
Another area about which I am positive is security. Leading US computer anti-virus company Symantec, for example, has just reported a sharp jump in sales of more than 29% and raised its earnings estimate for the current quarter and fiscal year.
But it is not just internet security that is performing well. Ever since 11 September, the pressure on US airports to tighten security measures has intensified. This has benefited companies such as InVision, an explosive detection system manufacturer, which has recently won contracts from major French airports.
The big cloud on the horizon is the geopolitical uncertainty. This is bound to have a negative impact on sentiment and confidence, while company outlook statements also appear cloudy.
I believe the US economy is close to a turning point and the US is the main driver for technology stocks. Its low interest rate and inflationary environment remains positive and consumer spending is still strong.
Once business confidence improves, and it can happen overnight, spending in technology will pick up and share prices will react quickly. The regular savings argument of pound cost averaging has perhaps, never been more pertinent.
Indications of economic recovery
Positive outlook for specific stocks.
Confidence returning to the sector.
£300bn of liabilities
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