Shaping a Portfolio for 2011 (V–and last): sectors

There are only two sectors I want to comment about–utilities and technology.


Utilities in emerging markets can be attractive growth companies.  Demand for their output typically rises quickly as a country industrializes and as a nascent consumer sector becomes more affluent and wants/is able to pay for more services.  All this growth requires near-constant expansion of plant and equipment, which the utility can, most times, only pay for by issuing new capital.  This implies rate-setters must establish a rate structure that’s profitable enough for the utility that investors are willing to keep on buying the company’s stock and bonds.

In a mature environment, the story changes radically.  Demand growth becomes a function of changes, up or down, in the population.  No new plant is required, so the main source of pressure on the regulators is from the votors, who want their utility bills to be as small as possible.    So rate increases are harder to come by.

Since the utilities can’t pick up and move, they effectively become price takers, growing at the rate of inflation–if that.  So they begin, more or less well, to diversify into non-regulated businesses.

My point?  …utilities in developed economies don’t do well when interest rates are rising or when investors are woried about inflation.  For the reasons I’ve described above, their cash flows–and as a result their dividend payouts–from the regulated businesses can’t rise much.  And regulators will drag their feet in allowing recovery of higher costs, as well.  So they can’t keep pace with competing fixed income investments.

I don’t buy the inflation fear story that has been circulating on Wall Street recently.  But worries about deflation–which would arguably be good for utilities–seem to be a thing of the past for this cycle.  That alone is probably enough to ensure utilities in the US will continue to underperform.


We’re in the midst of a technology revolution, which is seeing an explosion in demand for wireless, social networking and cloud computing.  Yet IT was an underperforming sector in 2010.  Yes, there was a large selloff in January as investors who had nursed their 2009 winners into the next tax year took profits.  But still…

The easiest way to see what’s going on is to look at the largest tech stocks by market capitalization–the ones with the greatest contribution to the sector’s performance.  They are, in order:

Apple     $300 billion+

Microsoft     $250 billion-

Google     $200 billion-

IBM     $185 billion+

Oracle     $150 billion+

Cisco     $115 billion+

Intel     $115 billion+

Hewlett Packard     $100 billion+

Amazon     $80 billion+

Qualcomm     $80 billion+.

The ten make up about $1,575 billion in market cap.

Okay, AAPL, GOOG, AMZN and QCOM are relevant to the current technology revolution.  But they make up only $610 billion of the total, or about 40%.  The rest are pretty much companies of the past, and as such, dead weight.

This implies to me that you can’t get effective stock market exposure to the current tech revolution through a technology index.  It seems to me that you either have to pick individual stocks or look for an actively managed fund.  Personally, I’d take my chances with one or two individual stocks.

Leave a Reply

%d bloggers like this: