Saturday, 3 January 2009

Whither SCS Share Indices?

(By Richard Holway)
December 2008
After the dire performances of late, December proved to be ‘not a bad month’ for shares all round. The FTSE100 advanced by 3.4% but the UK FTSE SCS Index was up 4.7% and the Support Index (which includes favourites such as Capita and Serco) advanced 5.6%. Telecomms did even better with a 7.9% increase thanks to a strong recovery in mobile telecoms stocks (up 9.3%). This recovery was NOT echoed in Europe – where both the Telecoms and Technology Indices fell c1.9%. That’s the good news out of the way.

2008 - Indices
The picture for 2008, as a whole, is depressing across the board with a 29% decrease in both the FTSE SCS and Telecoms Indices. The only consolation was that this was a smidgen better than the 31% decrease in the FTSE100 in the year. It was also a lot better than the European Telecoms (down 37%) and Technology (down 49%) Indices.

2008 - Companies
Three of our 'favourite' companies did particularly well in 2008. Microfocus (up 11%), Capita (up 8%) and Autonomy (up 8%). Serco was also down 'just' 3%. Given the average 29% decline in the FTSE SCS Index, those are truly remarkable performances. Another Boring Award holder - Sage - didn't do that bad either with a 26% decline on the year. Indeed I note that Sage (along with Serco and Autonomy) is mentioned in several "Tips for 2009" lists this weekend.

Conversely, Logica (down 41%) and Misys (down 46%) did much worse than the 'average'. Mind you not as badly as 2008's Wooden Spoon Winners - Morse (down 90%) and Innovation Group (down 83%).

2000 - 2008
The chart below shows the annual changes in the FTSE SCS Index so far this decade. In the eight years of this decade, the FTSE SCS Index has fallen by 91%. It’s actually even more if measured from the March 2000 high. In eight years the FTSE SCS Index has fallen in five of those years and only shown any gains in three years – 2003, 2005 and 2006.The SCS Index has fallen in both 2007 AND 2008.

I make the point again that that the massive 55% crash in SCS stocks in 2000 was followed by another two years of 57% and 60% declines respectively. If the same pattern is followed again, we are likely to be reporting another year of declines in 2009 before, hopefully, a recovery in 2010. I think that forecast would fit most other analysts views of the economy as a whole.

A rather more optimistic forecast, however, would be gained by looking at what happened to SCS stocks in the last recession to the UK in the early 1990s (readers should remember that the 2000 downturn was NOT echoed in the general economy). There was no FTSE SCS Index back in those days. But there was the ‘famous’ Holway SCS Index – unfortunately left to wither and die post the Ovum acquisition.

The chart below shows the changes in the Holway SCS Index from 1989 to 2000. The 8% fall in 1990 and the 23% fall in 1991 are pretty similar to the 7% fall in 2007 and the 29% fall in 2008. The optimists might therefore gain comfort from the very strong c50% growth in the index in both 1992 and 1993. If that was repeated in 2009 and 2010, the Index would be back to 875 - its level in Dec 2001.
Where now?
We got out of downturn of early 1990s because every bit of tech had its own ‘Next Big Thing’ – Windows, mobile phones, outsourcing, email, the internet, digital media etc.

As I described in my ‘Revolution’ presentation back in Sept 08, there are similar major changes in technology in the offing now too. (If you want to reread this – Click here to down load the pdf file) I really feel that ‘All the ducks are in a row’ for a major period of technology-led change.

Casting off my normally gloomy image, I really do feel that we could be entering a very good time to invest in technology. I am unsure about calling the nadir just yet - but I think we are close to it. A repeat of the performance of tech in the 1990s is not out of the question.

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