Shares digital

With the current slump many were looking to the gadget sector to perk things up. Russ Mould is unconvinced and has bad tidings for the tech bubble

US and UK equity investors have suffered fresh heavy losses during November and the need to find a haven is becoming more acute as the credit crisis unwinds. Technology stocks looked like a suitable hideaway when the sector outperformed the broader indices during autumn (See table). Investors latched on to the sector’s historic record of doing well in the fourth quarter, due to the Christmas gadget sales season, which traditionally begins in America on the day after Thanksgiving.

But, as warned by Shares (20 September) this outperformance trend has broken down in 2007. Tech stocks begun to fall even faster than the leading indices, as the sector has not proved immune from any potential global economic slowdown after all.

Cisco Systems (CSCO:NDQ) started the rot when the telco equipment giant’s usually ebullient chief executive, John Chambers, warned in October the firm had seen signs of a slowdown in sales to the financial services sector. Software and IT services company Misys (MSY) warned in early November it had become more cautious on its Treasury & Capital Markets division’s prospects. Management cited likely changes in spending patterns at banks in light of the current debt market volatility, a picture confirmed last week by Detica (DCA), in a statement which drove the IT and security consultant’s shares down 22% to an 18-month low.

Bond International (BDI:AIM), FDM Group (FMDG:AIM) and Fidessa (FDSA) also sell into the financial services industry.

All three have seen their shares suffer heavy selling despite an absence of fresh news and it may be best to wait before piling back in to the UK tech sector.

‘US dollar exposure is a problem, as it is taking the shine off forecasts, and there is huge financial services exposure, too,’ confirms Roger Philips of broker Evolution Securities. ‘The market is looking at anything with exposure to discretionary capex from financial services and those stocks are getting hammered,’ he adds.

But it’s not just firms with exposure to the rocky financial services sector who have suffered.

Component distributor Electrocomponents’ (ECM) shares took a pasting after its interims revealed decelerating growth momentum. Handheld logistics devices maker Psion (PON) warned last week of weakening sales in the US, which was perhaps hardly surprising after a second profits warning in two months from FedEx (FDX:NYSE). Micro-cap Nexus Financial’s (NXS:AIM) shares collapsed when its US partner’s credit supplier, GE (GE:NYSE), effectively pulled the rug.

If GE decides it no longer wants to finance American consumers’ purchases of PCs quite so generously, all tech stock investors should take note. Consumer gadget buying is a key driver of demand for the chip designs of semiconductor specialists such as ARM Holdings (ARM), IQE (IQE:AIM), CSR (CSR) and Wolfson Microelectronics (WLF). Even last week'’s warning from premium coffee vendor Starbucks (SBUX:NDQ) suggests US consumer are reining in non-essential spending at the worst possible time for tech stocks.

Evolution’s Philips does, however, flag Dimension Data (DDT) as one to watch. ‘The US is just 7% of sales and 70% of profits come from Africa and Asia,’ he says of the IT solutions provider. ‘It has exposure to the megatrend of network integration and the installation of internet protocol networks in emerging economies.’

Shares says:

BUY Dimension Data

HOLD ARM, Bond International, Detica, Electrocomponents, Fidessa, FDM Group, IQE, Misys, Psion

SELL CSR, Wolfson