Resilient tech stocks set to get recovery boost

By Joanne Frearson

LONDON (Reuters) - Top-performing European technology shares are set to rise further because the sector has coped with the downturn better than many other industries and is also quicker to benefit from early signs of a recovery.

Tech stocks already trade at a premium to many industry sectors but analysts and fund managers said this was justified because demand for the industry's services will remain strong over the long term.

They picked companies such as SAP (SAPG.DE), Autonomy (AUTN.L) and ARM (ARM.L), which have dominant positions in their line of business or offer niche services, as good investment bets.

"Whilst the world undergoes a synchronised global downturn due to the deflationary impacts of deleveraging, it comes as less of a surprise to the technology sector than other sectors," said Jeremy Whitley, senior investment manager at Aberdeen Asset Management.

"Tech has inherently been a highly cyclical sector, learning to cope with significant peaks and troughs in demand/supply factors, and it has been fairly quick in closing some aspects of overcapacity in order to reduce the level of underutilisation," he said.

Investors have been buying tech stocks as part of a shift out of defensives into more cyclical shares in anticipation of an economic recovery in the second half of the year.

U.S. group Texas Instruments (TXN.N) this week raised its targets for second-quarter earnings and revenue, signalling improving demand in the chip market and sending shares in mobile firms higher in U.S. and Europe.

The DJ STOXX European technology index .SX8P is up 15.7 percent this year, the sixth best performing sector in Europe. By contrast, the benchmark DJ STOXX 600 .STOXX index has risen 8 percent.

CHINA IMPACT

Allianz RCM Technology Trust's manager Walter Price has been shifting his portfolio towards Chinese tech companies amid growing sign of economic recovery there, and has stocks such as Longtop Financial Technologies (LFT.N), Baidu (BIDU.O) and Tencent Holdings (0700.HK) in his portfolio.

"We think that China will be the first country in the world to recover because of the massive stimulus they have supplied to their economy," said Price.

Latest surveys showed China's manufacturing sector continued to expand moderately in May, adding to tentative signs that the world's third-largest economy is stabilising after its $585 billion (354.9 billion pound) stimulus package.

Despite heavyweight Nokia's (NOK1V.HE) greater exposure to an uptick in Chinese demand, analysts were wary on the share due to new competition from Apple (AAPL.O) and Google (GOOG.O).

Analysts were also cautious on Sweden's Ericsson (ERICb.ST), the world's top telecom network equipment maker, even though it has been one of the top-performing bluechips in Europe since last September.

They said operators had further to go in cutting investment budgets.