London, 1 February 2010 – Chronic supply shortages, resurgent corporate investment and buoyant consumer demand will drive significant outperformance across the technology sector in 2010 – whether or not there is major global economic recovery, according to GLG portfolio managers Anthony Burton and Philip Pearson.
The pair, co-managers of the GLG Technology Equity Fund, which returned 55.4%1 in 2009, believe a number of trends will combine this year to propel tech sector performance above consensus forecasts – with a potentially ‘spectacular’ year in prospect if the global economy does enjoy a rapid recovery.
The first of the three key factors they believe will drive performance in 2010 and beyond is consumer demand. “Consumer demand has been incredibly strong,” says Burton. “Consumer PC unit sales in 2009 were the best since 2000. Global sales of LCD TVs grew by more than a third. Quite simply the price points of many key technology products, particularly netbooks and LCD TVs, have hit critical levels. History shows us that when this happens the rate of adoption of a new technology follows a rapid ‘J’ curve. These products have essentially become ‘disposable’ items that consumers are prepared to change according to fashion and innovation. That will be a hugely significant, multi-year trend.”
The second key driver of performance, according to Pearson and Burton, will be corporate investment, which is set to return strongly following a sustained period of low capital expenditure.
“A decade ago US corporates were spending more than 9% of GDP on technology,” says Burton. “Now that figure is just over 6% – a 38-year low. This lack of investment has saddled corporates with fleets of aging corporate PCs (older than five years), servers and other hardware. The evidence suggests the cost of serving and repairing PCs this old exceeds the cost of replacement. Corporates will therefore have to spend aggressively on modernising hardware in the next two years; indeed, we believe three years’ worth of capex is about to be condensed into the coming two. The introduction of the Microsoft Windows 7 operating system will also drive considerable investment by corporates in 2010 and beyond.”
Component shortages, say Burton and Pearson, will be the third major performance driver this year. “In the past oversupply caused much of the sector’s extreme cyclicality,” Burton points out. “But this time firms have been sceptical of the demand. Semiconductor companies reduced capacity in 2009 by 14%. In the tech recession of 2000-03 capacity fell just 6%. There is already too little supply in relation to demand, which shifts pricing power back to the supply chain. The hardware component manufacturers now have enormous leverage: their profit margins can rise by up to 50% if they experience just half their usual annual price decline.”
Burton believes the global IT brands like Nokia, DELL and Hewlett Packard will still see positive top-line trends in 2010; but, in the face of mounting component price pressures, will have little chance of outperforming the supply chain firms and component manufacturers.
“It is a case of investing in the firms that make the components or are involved in supplying them. Demand for components already exceeds supply and that situation will only get worse. A rapid improvement in the macro environment or a strong consumer recovery is therefore not required for these companies to perform well. But if there is a strong economic recovery, this could be a spectacular year for many technology firms.”
1 Retail Share Class