10 years after the TMT crash, technology is more imbedded in our everyday life that anyone would have then dared forecast.
Not only it has improved to be a nearly seamless experience, but also it has gone mainstream. While technology has constantly been improving our standards of living over the last decade, it has been painful for investors.
From their peak at the end of March 2000 to early March 2010, tech stocks have lost more than 60% in value, while world equities have been more or less flat over the period. Taken from the market bottom in March 2003, following the bursting of the dotcom bubble, they still lag global equities by nearly 15%.
This long period of underperformance has left the sector modestly valued, whereas ROE for the sector are now at very high levels.
ROE for the MSCI World Information Technology index stands at 18%, which is 5% higher than the global index. This is the largest positive spread between the Information Technology index and the MSCI World index since the inception of the sector indices in 2002.
But could there be light at the end of the tunnel?
Due to the cyclical nature of the industry, coupled with attractive valuation levels, technology has outperformed the recent market recovery from March 2009. Over the last 12 months, the MSCI World Information Technology index has delivered a 63% return in dollars, while the MSCI World index only returned 55%.
Over the last three months, technology outperformed the market by approximately 3%, a clear sign of positive momentum in a recovering market.
While increased momentum is one attractive feature, value is the other. Looking forward one year, the consensus price/earnings ratio suggest technology, relative to its own history – one year forward price to earnings and looking back five years – is now one of the most undervalued of the 10 MSCI sectors.
On top of this positive momentum and relative attractiveness, there are a few catalysts both short term and secular, which may well trigger a new era of outperformance for the tech sector.
On the cyclical side, fundamentals are very good. Low capital expenditure by technology firms last year resulted in a declining production capacity base, and in turn has driven high utilisation rates as chip-makers tried to catch up with a turnaround in end demand.The semiconductor inventory-to-sales ratio is declining fast, indicating the industry is on the verge of a substantial boom. Companies in many segments, such as semiconductors and component manufacturers, are at the front of the global supply chain, and are expected to feel the recovery much sooner.
Recent earnings reports and quarterly outlooks suggest the early stage of the recovery cycle is already underway.
Over the long term, there are many outstanding growth opportunities, not only in developed markets where companies will be concentrating on more efficient production and higher productivity levels, but also in emerging markets that have often shown the ability to rapidly adopt new technologies faster than developed markets.
James Millard, CIO, Skandia Investment Group
