Saturday, November 14, 2009

>Thematic Strategy: A further upswing for tech (BNP PARIBAS)

We believe investors have overlooked the strong possibility of a corporate spending upswing in 2010. The drivers to rising corporate capex are falling into place: Improving economic growth (capex has a beta of 2.5x to GDP), significant increases in free cash flow, and thawing of capital markets for corporate funding. Several industries should benefit, including tech, media, airlines, hotels and capital goods.

Technology is our preferred play on the theme for four reasons. First, with a severe cut in corporate tech spending this year (-8% in the US and -5% globally), tech investment is set to rebound. Second, lead indicators point to a 5-15% rise in real tech spending and a sustained demand recovery. Third, the corporate PC repalcement cycle should take off, spurred by aging PC and the release of Windows 7. Lastly, investors have a large underweight position on tech, whereas our Investment Wheel highlights tech as a major outperformer in Phase 4.

We expect a strong upswing in corporate spending in 2010.

Tech is our preferred play on this theme, due to 1) positive lead indicators, 2) depressed base, 3) PC replacement cycle and 4) investors’ underweight position.

Recommend buying Taiwan hardware producers and select India IT services.

While Asia’s consumer tech demand should stay robust, we believe corporate tech spending will be an important determinant of tech performance next year. Taiwan hardware stands out as the major beneficiary of this theme, due to high operational leverage and attractive valuation. For Indian IT services, a less-pronounced recovery and rich valuation necessitate careful stock selection. Our analyst is also bullish on the Korean memory business. Within these areas, we recommend four stocks to buy.

Strong upside for corporate spending in 2010
We believe markets have overlooked the significant upside potential for corporate spending next year. This is understandable. In this cycle, investors have been focusing on beneficiaries of the strong policy stimulus and resilient Asian domestic demand that triggered this V-shaped rebound. While the global economy is expanding again, concerns on the sustainability of the recovery linger, leading to expectation of muted private-sector investment ahead.

However, three factors support our upbeat view on rising corporate capex. First, corporate spending is a leveraged play on growth. Historically, capital spending has a beta of 2.5x real
GDP growth, based on US quarterly data over the past 40 years (Exhibit 1). With a depressed base in 2009, a moderate global growth outlook still could drive a strong rebound in corporate spending. Our economists forecast US GDP to grow 1.6% next year, up from a 2.6% contraction this year, while Asia ex-Japan is expected to stage a strong 7.4% rebound in 2010, recovering from the 4.8% pace this year.

To read the report: THEMATIC STRATEGY