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12th November 2014

Jeremy Gleeson, fund manager, of the Elite Rated AXA Framlington Global Technology fund, outlines why technology companies appear good value and highlights stocks to take advantage of key themes in the sector, following a broadly successful earnings season.

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Jeremy Gleeson, manager of the Elite Rated AXA Framlington Global Technology fund.

Does the US recovery bode well for technology stocks?

The economic recovery has been uneven and slower than hoped. However there are a number of signs which point to a sustainable recovery in the all-important US market, including corporate profit growth and rising industrial production and employment rates. Employment in the US is at a new peak, with more jobs than there were in 2007, before the recession hit. The combination of strong corporate profitability, high utilisation rates and job creation should bode well for the technology sector, as capital expenditure levels lift, as a result of better business confidence.

Technology companies are supported by strong balance sheets and are currently generating good profits. Corporate profit growth and cash generation has initially resulted in a focus on shareholder returns through raising dividends and share buybacks. Additionally, valuations continue to look attractive in relation to the sector’s potential for growth.

What is driving M&A in the sector?

The technology sector has seen a steady flow in the amount of merger and acquisition (M&A) activity. Due to improving demand, leading to increased production and a rise in factory utilisation rates, there has been a focus on buying existing capacity through M&A. An example of this is technology giant Apple’s acquisition of Beats, a clear leader in the headphone market. Apple appears attractively priced compared with other large- cap technology names, especially considering its product strength and capacity for growth that are not necessarily shared by other large caps.

If demand persists, and the more recent improvements seen in economies outside the US continues, we would expect businesses to start investing and building new capacity to satisfy this improving demand.

Can you outline some longer-term themes that could throw up some compelling ideas?

Long-term secular themes, such as ubiquitous computing, web 2.0 and digitalisation, should offer a number of opportunities. Facebook derives growth from both the web 2.0 delivery of social media and ubiquitous computing enabling access to content anywhere, anytime and anyplace. It has been posting very strong revenue growth, underscoring its successful transition from a desktop-based platform to mobile usage. Baidu, the Chinese internet company, is benefitting from the adoption of internet-enabled smartphones in China, marrying the themes of web 2.0, ubiquitous computing and globalisation.

Are there any other industries that will benefit from a thriving tech sector?

Technology continues to have an impact not just on the traditional industries associated with computers and electronics, but also on other sectors. NXP Semiconductors is reflective of how the world is becoming increasingly digital and electronics pervasive. The company manufactures components which have applicability in a wide variety of end markets including automotive, medical, financial payments and industrial.

Past performance is not a reliable guide to future returns. You may not get back the amount originally invested, and tax rules can change over time. Jeremy's views are his own and do not constitute financial advice.