Market volatility expected (page 1 of 3)

A multidimensional game is being played out - battling today's competitors for immediate marketplace success and investing in potentially game-changing, longer-term opportunities. From an investment perspective, in order to win out in the long run, one should stay with the established companies and diversify into other industries.

US Stocks

The pace of technological advancement has shortened the product cycle. What was leading edge 6 months ago may not be now. Also, the need to have a common platform will break down more barriers in the software industry, and eventually lower cost and increase competition. Coupled with lower stock trading cost (itself a result of technology improvement), market volatility will be the norm rather than an exception, as year-on-year earnings will be lumpy, as dictated by the shorter product cycle.

In order to move forward, one has to be quick to seize innovation, turn it into products and get them to market. In an industry where being first is almost as important as being right, there has never been a higher premium on the ability to innovate. Looking at the ratio of R&D expenditure to net sales in the following table, it ranges from a high of 28% to a low of 1.5%, the big spenders tend to be the technology companies, pharmaceuticals and biotechnology, whereas, the manufacturers spent less.

In absolute dollar terms, the top ten spent more than $2 billion a year on research, and IBM tops all with over $5 billion. There are major strategic battles being waged right now on:
-UNIX servers
-the software layer known as "middleware"
-a big shift in the semiconductor business, where the centre of gravity is moving away from PC processors to high-end server-class microprocessors at one end, custom logic chips at the other, and network processors in between.

A multidimensional game is being played out - battling today's competitors for immediate marketplace success and investing in potentially game-changing, longer-term opportunities.

From an investment perspective, in order to win out in the long run, one should stay with the established companies and diversify into other industries. In this context, old "Big Blue" wins out, and in the other industries category, Boeing (BA $60) and Eastman Kodak (EK $43.85) look interesting.

For Juniper, though it is taking market share from Cisco, but its net sales is only 3.6% of CSCO. DELL remains a PC assembler, not spending much on R&D.

US Technology Stocks

"Warning, visibility ahead is near zero, please reduce speed and navigate cautiously". This statement effectively summarises the current business cycle within the technology space (especially within the hardware equipment segment).

With a deceleration in economic activity in the US, corporate spending has geared down to sub-cruising speeds. We believe the focus of IT spending for the year 2001 will target technology add-ons that will help corporates optimise value from their existing infrastructure (rather than spending to enhance revenue reach). As such, we expect the hardware equipment segment of the technology sector to continue experiencing a depressive revenue growth outlook until summer approaches. On a relative basis, we expect software companies that enable corporate entities to maximise value from current assets to perform better in 1H01.

Rather than focusing on depressed segments (networking, semiconductors and PC makers) within the technology space and forecasting the bottom of the current down cycle (high risk exercise), we prefer to draw attention to areas that will perform in the present regime.