It looks like this year could prove another difficult one for the technology, media and telecoms sec...
It looks like this year could prove another difficult one for the technology, media and telecoms sector. However, the bad news is not universal - the large caps are certainly looking at a rocky ride ahead, but there may be opportunities beginning to emerge for the more flexible players lower down the food chain.
Jeremy Lodwick, chief investment officer at Framlington, says: "We expect to see plenty of good opportunities for stockpickers, particularly in the small and mid-cap areas. However, we expect 2005 to be tough year for the technology sector as a whole, with technology-based indices making little headway, partly because they are skewed toward large-cap old technology companies."
The three core technology themes at Framlington for 2005 are in digital convergence; broadband adoption and internet usage growth; and corporate budget growth opportunities.
Lodwick feels the broadband adoption and internet usage growth theme we are seeing is increasing internet traffic and so driving the demand for networking equipment. Digital content and devices are enabling new ways of living and are driving change. Presently, Lodwick is looking for companies that enable, and benefit from, a digitally networked world.
Within the corporate budget growth opportunities theme, Framlington is searching for productivity enhancing technologies that are set to capture an increasing part of the IT budget. Their main focus is on digital TV adoption as well as niche component suppliers that have pricing power.
Lodwick also feels 3G technology is set to become more popular.
Lodwick says: "2005 will be the year when we see the true impact of 3G technology. We expect to see increased usage and more network traffic as voice calls become cheaper. Stocks we currently like include SES Astra, which owns satellites for lease to companies such as BskyB: Enplas, which makes plastic lenses for camera phones; and Qualcomm, which makes chip sets used in 3G handsets."
According to Wellington Management Company, because new developments make existing technologies obsolete and allow for the constant creation of new products and services, the technology sector is a very attractive investment area.
The rapid rate of change and the large potential market attract entrepreneurs and capital to pursue these opportunities and many technology-based businesses are created every year. Technology has become really critical to competing in today's global markets. It also has had a dramatic effect on how consumers around the globe communicate, learn, shop and even play. As a result, technology spending as a percentage of real GDP continues to increase. Wellington expects the sector to continue to grow faster than the economy at large, and the potential and benefits of technological progress remain undiminished.
In the semi-conductor industry, Wellington feels the most promising areas in the sector are those that support the development of the web and the wireless telecommunication industry. With the demand for innovative wireless handsets strong, and the internet growing at an unbelievable pace, the demand for semiconductors stocks is expected to remain strong.
Wellington thinks handset manufacturers will continue to benefit from strong sales thanks to new users in emerging markets and a very healthy upgrade market elsewhere as the consumer continues to aspire to the latest phone technology. Meanwhile, the continued growth in data traffic, the convergence of voice, video and data technologies and the dramatic improvement in networking speed, all make the communications equipment sector a very attractive investment area. Wellington expect networking spending to capture an increasing percentage of IT spending for companies going forward.
In the hardware industry, Wellington sees data storage remaining one of the fastest growing segment in hardware: demand for increased storage capacity continues to grow as business continuance, disaster recovery and regulatory compliance remain high on corporate IT agendas. The exploding demand in consumer electronics has been another driver of demand for storage.
Interactive media and e-commerce represent large market opportunities especially as the number of internet users continues to grow, points out Wellington. Internet penetration rates in Europe, North America and Japan are relatively high, but the rest of the world still lags and presents significant expansion opportunities. Two of the fastest growth areas of the internet are marketing and advertising. Online advertising is becoming much more prevalent and is starting to challenge the traditional advertising media.
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