IT achieves strong ASX showing in FY10

But industry is tied to business cycle and could see share prices drop should confidence in the economy decline, analysts say

Ongoing confidence in Australia’s economic performance will likely see the IT pocket of the ASX continue to perform well but a peak in the business cycle may see share prices drop.

For the full financial year to 30 June, the AXIJ InfoTech index, which represents just a handful of publicly listed IT companies, rose more than 21 per cent and outperformed the ASX 200 index by more than 12 per cent.

In contrast the AXTJ Telco index, which was heavily weighed down by Telstra’s results, fell by more than 5 per cent.

Additionally, as the financial reporting season draws to a close it is clear IT organisations had a good run over the financial year with Melbourne IT, Data#3, SMS Management and Technology, Oakton, CSG, Legend and Hostech among others posting impressive results.

CMC Markets strategist, Ric Spooner attributed the IT results to a cyclical rise in business confidence.

“Cyclical sectors will typically outperform when the market is beginning to predict economic recovery,” Spooner said. “This was a factor in Info Tech's out-performance of telecommunications between the market low in early 2009 and the recent peak in April 2010.”

City Index Asia Pacific head of dealing, Michael McCarthy, forecast continued strong performances for the listed IT players as a group.

“Once you get a working business or profitable business model, the ability to scale is much more powerful in these businesses than it is in traditional nuts and bolts businesses,” McCarthy said.

“IT is highly leveraged to economic growth. If the economy is improving, and I believe it is, we are going to see it do very well.”

However, since the start of the new financial year, the Info Tech index – which is not representative of all listed IT players – has fallen by over 9 per cent while the ASX 200 has risen by over three percent, leading some to express caution.

On the telco side of the ASX, Spooner and McCarthy were split on forward prospects.

“That index is dominated by Telstra and they have big problems in that it is married to the old technology,” McCarthy said. “A lot of old hands in the share market say you never buy a transport stock, and that is what Telstra is – it is a data transport stock. As inevitably happens, whether it was shipping, railways or automobiles, new technology comes in and knocks you off. That is precisely what is happening to Telstra at the moment and they have to run furiously to stay in the same spot and they are swimming against the tide of history.”

Yet, several telco firms have posted strong full year results, including Amcom, iiNet, Vocus and Optus.

“Telecommunications is by contrast a staple industry with revenue streams being relatively stable throughout the business cycle,” Spooner said.

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