A review of the list of technology constituents within the Sharetrack portfolio reveals a strong representation from the large US powerhouses. Performance among this group has been broadly positive since the establishment of Sharetrack, as mirrored by the performance of the Nasdaq, which has rebounded strongly from its lows in early April of just over 1,600 to its current level of 2,300.
The two questions are what has brought about this reversal and will it be sustained. The answer to the first question has its roots in the steady stream of interest rate cuts by the US Federal Reserve. Market anticipation that this will lead to a reversal in the economic downturn in the US and hence company fortunes in the latter part of the year has led to a positive bias towards the technology sector over the past two months.
The sustainability of this trend will depend on the Fed actions having the desired effect through economic data and indications from the technology sector that the outlook for their products has at least stabilised.
As most companies have just issued quarterly results, company-specific positive news-flow will not emerge until July when the next wave of results comes around. In the meantime, the trend is broadly up with market sentiment, positive on the expectation that most of the negative news from the sector is already out.
However, while this is a generalisation that can be applied to the sector as a whole, investors ignore trends within specific sub-sectors of the industry at their peril, as evidenced by recent profit warnings from some of the European-based names on the list. Recent newsflow suggests that those companies with exposure purely to the European mainland will find the economic climate more difficult than their US counterparts although in truth few on the list fit into this category. Volatility is omnipresent within the technology sector and this trend will continue. We believe the sector will benefit should recovery of the US economy occur as anticipated and, as valuations and sentiment are broadly set in Wall Street, this will aid the sector as a whole. We would favour those companies that have continued to execute despite economic difficulties in the belief that if they can do so in difficult markets they are also likely to outperform in more favourable market conditions.
Also we would have a bias towards the software companies rather than the hardware vendors in the belief that they are more flexible and able to adapt quicker to changing market conditions, companies such as IBM, Microsoft, Oracle, Iona and SAP.
BT has announced a three for 10 rights issue. For the purposes of Sharetrack 100, all contestants holding BT shares had their rights sold at yesterday's £1.47 sterling close and proceeds credited to their accounts.
Gerry Hennigan is a senior equity analyst at Goodbodys
