At the start of a new year, I traditionally ponder where to find relative outperformance among the market’s sectors. As such, I believe now is the time for investors to add risk to their portfolios by emphasizing more cyclical corners of the market. While a defensive approach to equities was the best strategy last year, my view is that continued economic improvement in the US, a quieting of the European sovereign-debt crisis and further growth in emerging markets justifies a more offensive stance. For 2012, I am quite optimistic on the technology sector to take advantage of a better economic climate
The evolution of cloud computing should continue to change the face of the technology sector. Cloud computing currently consists of three basic segments: “software as a service,” which means accessing applications through the web; “platform as a service,” which involves companies operating their IT environments via the Internet; and “infrastructure as a service,” where companies use highly scalable data centers for offsite storage.
Enterprises will continue their shift toward cloud computing platforms largely because these systems offer efficiencies in both cost and productivity. Rather than maintaining complex IT environments and expensive infrastructures, companies save by contracting it to third parties and sharing the expense with other users. Cloud computing will also allow for greater workforce flexibility, enabling employees to access essential data and applications remotely via the Internet.
The transition to the cloud has already been underway for several years, with about $3 billion spent on cloud computing in 2012. And some estimates project that US companies will spend about $13 billion on cloud computing initiatives within the next two years.
Those trends should continue to benefit companies such as Microsoft Corp (NSDQ: MSFT) on the software side, and Oracle Corp (NSDQ: ORCL) and IBM Corp (NYSE: IBM) on the hardware side. All three companies are heavily represented in the portfolio of iShares S&P Global Technology (NYSE: IXN), which also includes a bevy of other companies involved in cloud computing.
The ETF’s performance was essentially flat last year, largely due to technology spending concerns which developed during the second half of 2011. The sector faced numerous headwinds, including global economic uncertainty due to the European sovereign-debt crisis, slowing growth in emerging markets, and constrained government spending. Despite those challenges, technology research firm Gartner estimates that global technology spending grew by 6.9 percent last year to reach USD3.7 trillion, and that spending should rise to USD3.8 trillion in 2012. Gartner also estimates that spending will grow by a further 5 percent between now and 2015.
But that estimate is largely based on a continuation of anemic economic growth. While some regions of the world could remain mired in an economic slowdown, Gartner is discounting positive economic data in the US and economic strength in much of Asia. I believe the sector will outperform on a relative basis in 2012.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.