Tech stocks were the leaders in the 1990s and were driven to unsustainable valuations as investors bought into the ‘technology dream’ en masse.  Then they were in the doghouse for 10 years despite continuing to grow revenues and earnings.  They had to rebuild their balance sheets, and they didn’t participate in the big bubble that went on earlier in this decade when financial stocks became the new ‘hot sector’.  Typically, when you come out of the bottom after a bubble, a different sector leads the market, so it was not a surprise that Tech stocks lagged.   With Financial stocks now being the lagging sector and speculative fevers starting to build in the commodities group, tech has become the perfect candidate to re-assume that leadership position.  Their balance sheets are in great shape with most of the larger companies holding substantial cash balances and they are right in the heart of the whole convergence of technology in the consumer space, including wireless and broadband.  The evolution of the technology sector has lead it to become a consumer product as much as a corporate product.  Moreover, most tech companies such as HP, IBM, Microsoft, Cisco, Apple and Intel are also very big in international and emerging markets, with the larger part of the growth in their revenue base coming from those regions.  International branding of items such as the Apple Logo, ‘Intel Inside’ or ‘Windows’ software has also made them ‘go to’ names for consumers everywhere.  Trading at earnings multiples below those of the overall market makes technology an interesting, lower risk play on continued global growth.  Risks remain the higher levels of obsolescence in the industry and the need to constantly provide new products.

In the ongoing battle between Research in Motion (RIM) and Apple over dominance in the smart phone market, a new report shows that RIM’s BlackBerry platform overtook Apple’s iOS in terms of U.S. mobile Internet usage in November.  StatCounter released new data that shows BlackBerry ahead of the iPhone for the first time ever. RIM’s BlackBerry OS had a 34.3 percent Web browsing share in November, slightly ahead of Apple’s 33 percent.  But the Web analytics company also revealed that probably the most serious new contender is Google’s Android which continues to grow in share. A year ago, it had an 8.2% total share, while this year that grew to 23.8%.  In the same period, Apple’s iOS has seen its Web browsing share tracked by StatCounter drop from 51.9% to 33%.  The data is based on 15 billion page views per month, collected from more than 3 million websites!

The bottom line for stock markets going into 2011 is that the outlook still looks very good to us. Economic growth is recovering, maybe not at as fast a pace as everyone would want but we have clearly come out of the recession and into a period of global economic expansion again.  Corporate restructuring has lead to stronger profit growth and improving margins, with total profits set to surpass the record levels set over three years ago, possibly sometime later this year.   Although stocks have rallied significantly from the lows seen in March of 2009, they are still under-valued relative to most of their historical valuation measures.  On top of all of this, interest rates should remain low for “an extended period of time” unless inflationary pressures start to emerge again, an occurrence which seems highly unlikely in the near future in our view.  The problems of the financial world haven’t gone away; debt levels are still near records and the US continues to ‘run the printing press’ and add to their massive debt.  But the world no longer revolves around what is happening in the US economy.  Growth will continue outside of North America for many decades to come and Canada is exceptionally well-positioned to provide the products that the world will need.  A cursory, non-statistical survey of opinions done over the holiday season confirmed to me that many investors continue to be sceptical about this recovery and the stock market in general.  As long as those conditions persist and investors continue to view bonds as a ‘safe haven’ investment, we think that stock prices will continue to grind higher.  That’s not saying that there won’t be corrections of 5-10%, and perhaps more, along the way.  But the kind of economic and financial scenario that lead to the debacle in 2008 are a long way off.  The water is fine; don’t be afraid to go for a swim!

 

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