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Wednesday, December 14, 2011

Optimism over tech stocks points to US recovery

Published December 14, 2011


(WASHINGTON) Profit forecasts for computer and software makers are holding up better than any industry in the world, a sign of confidence that corporate spending will keep the American economy expanding next year.

Net income at companies from Apple to Oracle will rise 11 per cent in 2012 on average, according to more than 2,900 analyst projections compiled by Bloomberg.

The profit estimate is down 2.3 per cent from its peak this year, the smallest reduction of any industry in the MSCI World Index. Utility forecasts were cut the most at 29 per cent.

The resilience in technology, which accounts for more of the US market than any other industry, underscores optimism that the American economy is recovering even as Europe's debt crisis spreads and China's growth slows.

'Technology companies are being helped by the dramatic improvement in the health and profitability of corporations,' Stephen Wood, who helps oversee about US$163 billion as the New York-based chief market strategist for Russell Investments, said. 'When the market finally has the time to assess fundamentals, IT stocks will be one of the sectors that will benefit.'

Bears say estimates for record profits are too high and investors risk the same losses they suffered in 2000 and 2007, when computer- related shares began declines exceeding 56 per cent.

Capital spending at US companies is the highest since 2008 and investment in equipment and software climbed at a 15.6 per cent annual pace in the third quarter, according to the Commerce Department.

Technology expenditures may climb 3.9 per cent to US$2.7 trillion in 2012, research firm Gartner Inc said on Oct 17.

Concern that Europe's debt crisis would trigger a global recession dragged equity markets in 37 of the 45 countries in the MSCI All- Country World Index into bear territory in 2011, or declines of 20 per cent from a peak.

Technology stocks are trading at lower valuations than drugmakers or housewares suppliers.

The industry has a so- called PEG ratio, an indicator popularised by Fidelity Investments' Peter Lynch, of 0.87.

The PEG ratio, found by dividing the price-earnings multiple by estimates for profit growth over the next three years, for healthcare providers in the MSCI gauge is 1.11. Household product makers trade at 1.49 and the full index is valued at 1.11. The closer the ratio is to 0, the cheaper the company.

'They're at very reasonable valuations,' Tom Wirth, who helps manage US$1.5 billion as senior investment officer for Chemung Canal Trust Co in Elmira, New York, said. 'The outlook is fabulous for the tech group, mainly because this is the one area where businesses feel they need to invest.'

The MSCI World slipped less than 0.1 per cent last week to 1,187.29 after the European Central Bank damped speculation that it would boost sovereign debt purchases. The gauge of computer- related shares increased 0.7 per cent in the past five days, the second- biggest advance among 10 industries, to pare its decline for the year to 0.8 per cent.

Technology stocks in the MSCI Asia-Pacific Index climbed the most of 10 industries on the measure on Monday.

The decline hasn't kept some of the smartest investors from buying technology companies. Warren Buffett, the billionaire chief executive of Berkshire Hathaway Inc, spent more than US$10 billion on shares of International Business Machines Corp, making the company his second-biggest holding.

IBM climbed 2.6 per cent last week to a record US$194.56, bringing its 2011 gain to 33 per cent.

Estimates for 2012 income at Oracle and SAP, which develop business software, have risen more than 4.6 per cent this year, according to analysts' forecasts compiled by Bloomberg. Projections for technology firms have fallen less than for any other group in the MSCI World this year amid increased spending on iPhones, tablet computers and digital cameras.

Forecasts for telephone service operators fell 9.7 per cent since peaking on May 2; estimates for raw material producers and oil suppliers were reduced more than 10.8 per cent.

Analysts say computer companies will post more growth next year than drugmakers or producers of household goods, the only MSCI World industries with rising share prices this year.

Healthcare providers in the global equity benchmark may increase income by 4.5 per cent in 2012, while an index of grocery store operators, foodmakers and tobacco companies will earn 9.3 per cent more, according to data compiled by Bloomberg.

'People may reduce spending in other places but they won't cut their smartphone,' said Arthur Kwong, the head of Asia-Pacific equities for BNP Paribas Investment Partners, in an interview from his Hong Kong office on Nov 22. 'It's something people can't live without.' - Bloomberg

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