How tech is bucking the global trend

Jeremy Gleeson, portfolio manager at AXA Framlington, explains why interest in the technology sector is gaining pace.

The global economic recovery that followed the financial crisis of 2008 has been faltering, at least in the UK and the eurozone, and certain emerging markets have slowed faster than others.

Although US confidence, supply management and unemployment data have all improved recently, Japan’s devastating earthquake and tsunami in March 2011, as well as political unrest in the Middle East, have caused fluctuating oil and raw material prices.

Stock market volatility has also been heightened by the as yet unresolved eurozone sovereign debt crisis, notably for Greece, Portugal and Italy, despite December’s EU summit.

Tech resilience

Despite these global issues, results within the technology sector have remained robust in the face of difficult business conditions. According to Bloomberg, as of 30 January 2012, 27 of the 56 technology companies within the S&P 500 Index had reported fourth quarter 2011 results. Of these, 74% surpassed expectations for revenue, and 89% exceeded forecasts for their earnings per share.

Just three of these technology companies missed their earnings forecasts. It is commendable that, even in a tough economic environment, management teams in the technology sector have been able to manage their profitability well.

In comparison, it is worth noting that, at the time of writing, of the 170 companies within the S&P 500 Index that have reported fourth quarter earnings, 54 (32%) have fallen short of forecasts, evidencing the better relative financial health of technology companies, versus the S&P 500 Index’s constituents as a whole.

Not only has the technology sector proven to be more resilient than many anticipated, due to cash-rich balance sheets, low debt levels and strong cash flows, it has also been a leader in the recovery as enterprises continue to invest in new technologies, particularly ones that help them to improve their productivity and efficiency.

The political turmoil surrounding the US sovereign debt ceiling and the delayed approval of last year’s US Federal budget caused issues for expenditure plans. This is likely to be exacerbated by the presidential elections due in November this year.

All of these factors have an effect on technology because, when management teams lack confidence in the economic outlook, technology purchasing decisions are delayed where possible.

There are also signs that ongoing turmoil in financial markets is resulting in banks further rationalising their workforces. All these concerns contributed to technology companies generally revising down their expectations for the second half of 2011.