Resilient tech stocks to get recovery boost

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 (355 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.

NICHE PRODUCTS

The fact that many technology products lie at the core of the way companies run their business also allows companies in the sector to hold on to relatively high margins, justifying their slightly higher valuations.

Germany's software firm SAP, which carries a one-year forward price-to-earnings of 17.1, was an example, according to Dan Ison, head of pan-European equities at Threadneedle.

"SAP has an extremely strong customer base and once they have installed the software it is difficult to do without it," Ison said.

"It is very likely once the customer has bought the first round of software then they will be adding bits to it allowing the company to significantly grow software licence sales," he said.

European tech stocks have a forward price to earnings ratio of 15.7, more expensive than the STOXX 600's 11.8 times but lower than the 17.5 times for the basic resources sector .SXPP, the region's top performer this year.

"We do not see technology as expensive -- while you are paying a slightly higher P/E you are getting very good long-term high growth," said Elaine Coverley, equity analyst at London-based broker Brewin Dolphin.

"With technology you've got a fantastic long-term growth story as consumers require demand for more sophisticated products -- phones, televisions and set-top boxes," she said, adding she favoured ARM, which designs processor cores for chips that power about 90 percent of the world's mobile phones.

Britain's Autonomy, whose software helps firms search data across phone calls, emails, video and instant messages, is another clear favourite among fund managers and analysts.

"Autonomy has been growing rapidly and giving conservative guidance. Autonomy has been focused on a niche area in the search market sector which has become very much in demand," said Allianz RCM's Price.

(Editing by Dominic Lau and Sitaraman Shankar)