Tech Should Continue To Outperform The Market…Here’s Why
In
yesterday’s column, I listed some factors
that would cause the equity markets to start a more
sustained upward trend, should the war in Iraq not end in disaster. Today, I
would like to focus on a segment that would outperform the broader equity
market, should such a trend develop…
For the past three years, businesses have been
cost-cutting in an effort to restore profitability and are now running very
lean. A significant portion of these cuts have occurred in capital investment
(goods and equipment), more specifically in technology spending. As a result,
business equipment inventories are now below their pre- IT bubble levels.
And it is now becoming apparent that businesses
will need to pick up spending in order to continue their productivity gains and
remain competitive over the long term; it is now estimated that 35% of business
computer hardware is over four years old and is ready to be upgraded. Other data
also suggest that a sustained pickup in tech spending is in the pipeline–again,
should the war in Iraq not spiral out of control.
A lower interest-rate environment has led to a
substantial rehabilitation in corporate debt. And this, coupled with a virtual
halt in capital spending, has left businesses with a very high cash to
short-term debt ratio. Moreover, the gap between business spending and cash
flows has fallen to levels that are consistent with an increase in spending.