Get Ahead of the Tech Shopping Spree

01/31/2011 11:30 am EST

Focus: ETFS

Benjamin Shepherd

Analyst, Breakthrough Tech Profits, Global Income Edge and Personal Finance

Rebounding global IT spending and the likelihood of more buyouts favor this small-cap technology ETF, writes Benjamin Shepherd in Global ETF Profits.

After a sharp decline of more than 8% in 2009, consumer and corporate technology spending began to rebound in 2010—to the tune of about 5% growth. This spending helped lead to a solid year for tech stocks in 2010, and this year should prove even stronger for the sector. Corporations across the board continue to work through the aftereffects of the recession. But despite the struggles of the broader economy, corporate profits as a whole were robust in 2010. Firms will put this cash to use in 2011 by boosting information technology (IT) budgets.

Analysts expect global IT spending to grow by 5% to 10% this year to just over $2 trillion. Much of that growth will be driven by a new focus on long-term investments in IT infrastructure. During the past two years most IT budgets have been devoted to replacing older computers and servers, essentially patching the gaps in current systems. But with several new platforms on the market, most notably Microsoft’s (Nasdaq: MSFT) Windows 7 operating system, there will be renewed emphasis on meeting long-term IT needs.

Russia Plays Catch-Up
Brazil, Russia, India, and China—the so-called BRIC nations—should also bolster global IT spending this year. Russia is on a spending spree to develop its own Silicon Valley, a feat that will require substantial investment in foreign IT products. China, India and Brazil also suffered an IT investment slump during the financial crisis, though to a lesser degree than their counterparts in the developed world. Look to these countries to pick up the slack in technology spending in 2011.

Consumer spending on technology, however, continues to face headwinds. Households have been focused on paying down debt rather than making discretionary purchases, which has resulted in fewer sales of laptops and other gizmos. However, this trend is beginning to reverse. Consumer-oriented technology firms such as Intel (Nasdaq: INTC) have experienced strong revenue gains in recent quarters as consumer spending has started to recover. Perennial analyst darling Apple (Nasdaq: AAPL) is benefiting from its new hit product, the iPad tablet computer. The holiday shopping period was strong, with electronics ranging from flat screen televisions to laptops enjoying brisk sales, even in cash-strapped Europe.

How to Play Tech M&A
We also expect that 2011 will be a big year for mergers and acquisitions (M&A) activity in the tech sector. Last year saw a sharp uptick in M&A activity as industry powerhouses such as Hewlett-Packard (NYSE: HPQ), Oracle (Nasdaq: ORCL) and Intel began to deploy their substantial cash hoards. 

PowerShares S&P SmallCap Information Technology Portfolio (Nasdaq: XLKS) provides exposure to the coming wave of tech-related M&A. The ETF is heavy on financial IT names, firms involved with cloud computing and mobile phone applications—three industry niches that will experience significant M&A activity this year. The portfolio has an average market capitalization of $911 million, and more than a quarter of its holdings are micro-caps. Such holdings are likely acquisition targets for large-cap tech firms with cash in their pockets.

Even if the fund’s holdings don’t pique the interest of an Oracle or Intel, a flurry of deal making will raise valuations for small-cap tech firms across the board. A rising tide will lift all boats, and fuel investment gains.

[Tom Aspray recently recommended seven tech stocks poised for big things this year. Nicholas Vardy avors a leading name in global outsourcing. Jim Jubak is bullish on the key supplier of equipment to Chinese makers of LED chips—Editor.]

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