Will Singapore's Technology Sector Crash In 2012?

23 Dec 2011

2011 has been a hard year for the industry and it seems like things won’t get any better soon.

OCBC says rising cost pressures, including labour wages increases, raw material costs and higher interest rates, especially in China, have culminated in a margin squeeze on companies.

Macro headwinds are likely to remain strong come 2012; hence tepid growth is expected for the sector.

Here’s more from OCBC:

Macro headwinds continue to cast a pall. 2011 has been a year fraught with challenges and uncertainties for the technology sector. Events such as the historical downgrade of the US government credit rating by S&P and escalating concerns over the euro zone sovereign debt crisis have amplified the frailties in the macro economy and heightened investor risk aversion.

As such, the highly cyclical tech sector has taken a hit in both its financial and share price performance (the FTSE ST Technology Index has significantly underperformed the broader market YTD). Moving into 2012, we opine that macro headwinds will remain strong. Hence we are expecting tepid growth for the sector, in tandem with easing global economic conditions. Many of the tech companies we spoke to have highlighted the cautious sentiment adopted by their customers, thus increasing the risk of order delays and/or pullbacks.

Cost pressures and cloudy visibility to persist. This situation is exacerbated by rising cost pressures, as increases in labour wages, raw material costs and higher interest rates, especially in China, have culminated in a margin squeeze on companies. Currency volatility and supply chain disruptions from recent catastrophes have also shrouded the visibility of the tech sector.

Lessons learnt from the past. In general, we note that tech companies have emerged from the last financial maelstrom with stronger balance sheets. This should provide them with better resilience to weather another economic downturn, in our view. For the companies under our coverage, all with the exception of ECS Holdings are in a net cash position.

Better long-term prospects. We believe that the tech sector still carries good long-term growth potential, given the increasing importance of IT as a business growth driver, continued technological innovation and rising affluence in the region. Stronger growth would likely come from the emerging markets as ample opportunities exist for continued IT penetration.

The share prices of most tech stocks have already corrected sharply this year. Although current valuations do not appear demanding, downside earnings risks exist should the macroeconomic landscape continue to deteriorate sharper than our expectations. On the other hand, cyclical plays could also potentially benefit from a stronger rebound should the global economy recover faster-than-expected. In our view, the possibility of the first scenario seems more plausible.