Whither tech stocks?

(By Richard Holway 4.00pm 26th July 09) Each month recently, when we review the performance of the various share indices, we have noted how the FTSE SCS Index has not only substantially outperformed the FTSE100 but it had actually moved in a different direction. By the end of June 09, the FTSE SCS was up a remarkable 34% but the FTSE100 was down 4% YTD. We made the point repeatedly that we believed this was unsustainable. (For an excellent article on tech sector stock performance see FT 24th July 09 Investors switch on to tech )

One of the main reasons for the strong performance of UK SCS stocks is that earnings have held up well. In many cases this has been a result of cost cutting - not revenue growth. SCS has historically achieved its high ratings because of its high growth potential. Earnings growth without revenue growth is, of course, a trick you can pull off only for a short period.

Over every medium term period in the last 20 years, the FTSE SCS and FTSE100 have pretty much performed the same. Only exception was late 1999/early 2000 – and we all know what happened after that! Indeed that ‘bubble’ was but the “exception that proved the rule”. So our view was that in the second half of 2009, either the FTSE SCS was in for a crash OR the FTSE100 would rally and not carry the FTSE SCS with it.

Well, as you will no doubt have read in all the newspapers this weekend, the FTSE100 has had its best run in a long while. Indeed it is up 10% in 11 consecutive days of rises. The same cannot be said of the FTSE SCS index. In July to date, the FTSE 100 is up 8% but the FTSE SCS up just 2%. SCS is just a part of the market as a whole. Of course it will have stars and it will have laggards but we don’t know any real reason why, in its entirety, it should outperform. Overall we would expect SCS to perform pretty much ‘in line’ with the FTSE100 over any reasonable period (ie a year). Most analysts seem to expect the FTSE 100 to continue to perform well – afterall it has an almost impossibly long way to go to recover to the 6700 level it hit just two years ago back in July 07. This can only mean that, at best, the FTSE SCS is in for a period of flat-lining.