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Investment & Strategy

IT sector - the road ahead

For the IT industry, 2016 was a year of innovation and adoption of upcoming technologies across all segments. While the upcoming technology companies were the leaders, the legacy companies worked on developing their product/services to adapt to the changing environment. The key themes for 2016 were Cloud, Big Data, IoT, Artificial Intelligence (AI) and Security. We expect the trends in the industry to remain the same in 2017. 2016 has been a good year for the IT sector in terms of performance as the MSCI World IT Index gained 11% outperforming the MSCI World Index which rose 5.2%.

Semiconductors and semiconductor equipment was the best performing sub-sector within IT. Despite stagnating growth from PCs and smartphones, growth in the semiconductor industry was driven by: (1) increased demand for high-performance semi chips from enterprise servers and hyperscale data centers for big data analytics and cloud computing, and (2) growing adoption of connected cars and the industrial internet. Steady technological transition in the memory segment has helped lower input costs and drive higher prices, benefitting memory players like Samsung. We expect this trend to continue in 2017.

The hardware segment has been under pressure due to weak demand for hardware equipment as organisations are working on increasing the efficiency of their existing installed base. However, the PC segment has shown signs of bottoming out and we expect it to recover in 2017. On the enterprise side, we expect demand to be driven by further adoption of IoT and cloud, and continued focus on improving the efficiency of the existing datacenters. On the smartphone side, while there have been issues such as the recall of the Samsung Galaxy Note 7, the overall unit sales are still expected to be up ~1% in 2016 (as per IDC). While the smartphone market is saturated, we expect it to post a steady growth as users upgrade their existing device following the 2-3 year upgrade cycle. In addition the increasing adoption of Virtual Reality for gaming and movies should also provide some support.

While the shift from on-premise applications to cloud continues to be the dominant theme for software companies, growing competition among cloud vendors should compel large vendors to expand their product portfolio through M&A. Oracle’s acquisition of NetSuite for ~USD 8.7 bn and salesforce.com’s purchase of Demandware for ~USD 2.8 bn are a case in point.

Further, the rising demand for greater customer and product insight arising from the growing penetration of connected devices and cloud should lead to the increased adoption of big data analytics and AI.

Key drivers of IT services industry including project and consulting, and outsourcing and support services are expected to grow in the low to mid-single digits. Increased demand for cloud-based products, mobile and analytics are expected accelerate growth in IT services in FY17. IDC expects the service industry to increase at a CAGR of 3.8% to USD 1.1 trn by 2020. The US remains the largest and one of the most important in terms of IT services spending followed by EMEA. Nevertheless, Asia-Pac is expected to lead the race in terms of growth with a 5% CAGR in spending to USD 190bn by 2020. This should be further fuelled by economic reforms in the region, particularly in India, which is moving towards a digital and cashless economy benefitting payment processers and the larger IT services space.

 


Author
Equity Solutions, IT Team

Data & recommendations as of December 30th, 2016 close

This document is an objective and independent explanation of the content of the recommendation and cannot be considered as adapted to a person or based on the analysis of the situation of a person.