Week 21: Technology sector to outperform

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Week 21

TECHNOLOGY SECTOR TO OUTPERFORM

We are bullish on the outlook for investment into the Information Technology (IT) sector…
as companies worldwide have underinvested in technology upgrades in recent years and we expect a boost to the sector as they rush to correct this and increase their investments into IT.

Further supporting our positive view is that fact that many IT companies have strong balance sheets which can be used to support mergers & acquisitions and boost growth further. Investors could also benefit from improved confidence and strong potential for distribution of excess cash.

Central to our bullish view on the sector is evidence that shows companies have underinvested in technological improvements during the past several years. This can only occur for so long if companies want to remain competitive in this global environment, and we believe we are now at the point where they need to upgrade equipment.

The cautious consumer now seems to be willing to spend more on technology and consumer confidence is now at its highest level since 2001. This should give the tech sector two major lines of support: business and the consumer. Business confidence is showing signs of improving as CEO confidence in the economic outlook rose 19.1 points in the  first quarter, the most since 2009, while the resulting total of 93.3 is well above the historical average of 79.8. Also, recent data showed small business optimism stayed at an elevated level at 104.7.

Balance sheets in the information technology sector appear solid, with large cash balances and relatively low debt. We believe this enables the group to pursue mergers and acquisitions that might help performance by removing competition and consolidating expenses. Additionally, we have seen tech sector companies increase their dividend payments, which may become a larger part of total equity return in the near term, while they have also increased share buybacks, which helps to reduce available shares to be purchased.

Finally, the innovation and entrepreneurial spirit that seems to pervade the technology sector make us excited about its future and support our positive view.

Positive factors for the technology sector include:
Increased technology spending: With productivity relatively weak, companies should look to technology upgrades to improve efficiency. Capital expenditures have been below trend for several years, and a return to more normal spending levels would boost the sector.
Wage increases: Increasing wages, including raising the minimum wage in various areas, could push companies to turn to technology to replace increasingly expensive human workers.

Negative factors for the technology sector include:
Increasing global competition: Competition, especially from areas with low labor costs, will likely continue to compress pro t margins.