Recently, the technology component of my portfolio has reached 15-20%, invested in companies with dominant market shares and minimal debt (DELL, INTC, NVDA and CYMI). The entire tech sector has been in slump in recent months due to a combination of the saturation of the desktop market in the US, and the flop of Windows Vista. I believe that the tech sector will pull out of this slump soon, driven by demand for computers from the fast rising Asian economies (China and India).
This investment thesis may appear to be a rather risky one at first glance. After all, economic growth has slowed dramatically in the US and Europe, and as the Asian economies are heavily weighted towards export to the Western economies, there is widespread consensus that these economies will also slow. However, in recent years, a middle class has emerged in the Asian economies, especially in China. Despite the recent drop in the Chinese stock and real estate markets, the newly-minted middle class still has wealth unimaginable just a generation ago. To combat an impending slowdown due to the malaise in the western economies, the Chinese government is likely to attempt to stoke consumerism among the middle class to boost domestic demand, to promote the development of a more service-based economy, as well as to move up the value chain in the goods it produces. All these trends will boost demands for computers. In fact, I see computers as the single most productive investment that can be made by the Chinese economy. Rather than hold onto depreciating US Treasuries and bonds, the Chinese government can embark on a program to massively upgrade the technological and educational infrastructure of the country. In order to give birth to the future Googles and Microsofts, China needs an educated and technologically savvy population. Even among the middle class, only 20-30% of households now own a computer. In support of this view, Lenovo has recently announced that its quarterly profit has risen 65%, driven mainly by demand in China and the emerging economies.
In the future, I see companies such as Dell, Intel and Nvidia as being more like Coke and McDonald’s, deriving the bulk of their profits from outside the United States. Already, Dell’s international sales has outstripped its domestic sales. Furthermore, even within the US, hardware and software upgrades cannot be indefinitely postponed. At some point, demand will recover. Here, again, timing is the bugbear. However, given the excellent financial positions of the companies I’ve chosen, I expect them to outlast even a protracted domestic recession.
