With computer giant Microsoft to axe up to 18,000 jobs, the technology sector is once again under the spotlight and raising concern among investors.
Mid-July saw Bill Gates’ behemoth announce a restructuring plan, aimed at simplifying its organisation and aligning the recently acquired Nokia Devices and Services business with the company’s overall strategy. As a result, thousands of employees are set to be made redundant.
So far, 2014 has witnessed an abundance of activity in the technology sector, such as Apple’s acquisition of luxury headphone maker Beats.
Year-to-date, tech barometer the Nasdaq Composite is up by 7%* but this this overall gain masks some major volatility. On 11 April, the index dropped 3.1% - its worst one-day percentage loss in three years - with investors selling out of stocks that had performed robustly as valuations appeared overstretched.
Walter Price, manager of the RCM Technology Trust’s, has admitted the volatility this year has led to some very active management of his portfolio. In terms outlook however, he believes the sector can still provide some of the best absolute and relative return opportunities in the equity markets, with a wave of innovation potentially to produce attractive returns.
He said: ‘We also see a number of companies whose present valuations, in our view, do not fully reflect positive company and/or industry-specific tailwinds.
‘We agree the valuations on many cloud and internet companies had become too lofty. In this sense, we think the pull-back is a healthy way of purging some of the speculative excesses that built up in the markets more recently. That said, we continue to see new markets for these dynamic areas of technology that are much larger than the combined market capitalisation of these groups. We have consolidated our exposure to these areas in select companies that we believe have the most compelling solutions and whose business models demonstrate a discernible path to deliver strong earnings and cash flow growth over time.’
Tom Slater, deputy manager, Scottish Mortgage Investment Trust, added: ‘On the whole, the sector has grown considerably from what it was 15 years ago and tech companies have a much larger market to sell to now. There are now at least a billion smartphone users, an increase on the 50 million or so PC users in the late nineties. Technology can offer a diverse section of risks and rewards. People who have no interest in examining the long-term potential of individual companies are largely accountable for dramatic movements in the market. Where a company’s value is 10 or 15 years in the future, you have to accept share price volatility and hang on while the big trends play out. Turbulence is par for the course.’
*Source FE Analytics – to 22 July in US$ terms