by Stephen Martin
Just when it seemed things couldn't get worse for an already beleaguered tech sector, they did just that: recent profit warnings from the likes of Nokia, Cap Gemini, Dimension Data and, most recent of all, Marconi, show that the market has not yet realised just how fragile technology earnings are under deteriorating economic conditions - conditions which the European Central Bank, with its express mandate to ensure price stability rather than pursue growth, isn't helping to improve.
This year, Europe's leadership in mobile and fixed-line telecoms equipment has been a curse rather than a blessing, as the sector continues to suffer from slowing subscriber growth, delays to new services and the financial strains of weak profitability, heavy investment and high licence fees. The net result is that indebted, and barely profitable, network operators have been forced to slash their investment budgets - not to mention the economy-related cutbacks in technology consultancy, software and equipment. However, the upside is that such a nasty dose of realism has turned investor attention away from the promising advances that are already looming on the horizon - in particular, mobile data-enabling GPRS and 3G services. And although investors are unlikely to fall for the hype in the current climate, they should be able to check out the services for themselves towards the end of this year. This alone is likely to improve sentiment.
As for the US, we expect signs of recovery to mount in the second half, now that more and more companies, including Dell and Oracle, are predicting stabilisation later in the year. However, it's possible that technology will lag this pick-up, given the overhang from the triple-boom of deregulation, Y2K and dot.coms. The Fed's no-nonsense rate cutting is also likely to take effect soon although expect the recovery in Europe to come a few months later. As for when sentiment turns, investors should keep their eyes peeled for signs that profit warnings have led to stocks rising, rather falling. But while this is starting to happen in the US, it's not yet evident in Europe.
Another important factor to bear in mind when looking at the global picture is Europe's relative under-investment in technology in relation to that of the US. In an increasingly competitive world, European companies will have to raise their investment in technology to match the levels of productivity and customer service their US counterparts have achieved through investment in IT. In a nutshell, so-called 'last-mover' advantage, the benefit that comes from buying tried and tested products rather than pioneering new technologies could be to Europe's advantage.
As for the EuroTech fund itself, the continuing plight of the telecoms industry has led us, for the time being at least, to refocus on software companies that can show clear benefits in cost savings or enhanced customer service. SAP continues to lead the field and has confounded recent fears by expressing optimism for the future as their products continue to sell well. We are also encouraged by steps mobile network operators, such as Orange and Vodafone, have taken to improve profits and cash flow. Other areas of interest currently include such fields as alternative energy generation and interactive learning. Vestas Wind and Riverdeep are two European companies who are leading global markets in these fields.
The EuroTech Fund Focus sheet can be downloaded as a PDF file here
Stephen Martin is manager of RSA Investments' EuroTech fund
Stephen Martin is manager of Royal & SunAlliance Investments' EuroTech fund.
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