IT industry braces for more market turmoil

Australia’s technology industry should prepare for the potential return of flat or even declining IT budgets in the wake of turmoil on global financial markets, according to a prominent Australian analyst.

The Australian share market recovered slightly yesterday after several days of consecutive falls sparked by debt crises among governments in the United States and Europe.

Some $120 billion has been wiped off the Australian share market over the past week after ratings agency Standard and Poors downgraded the US Government’s credit rating over its inability to service debt.

Trading in information technology stocks have declined roughly in line with the wider market.

Yesterday the Australian share market plunged five percent within minutes of opening, but was swiftly corrected in a flurry of late trading to close slightly higher than it had opened.

Mark McDonnell, IT and telecommunications analyst at BBY said the day-to-day volatility of share prices was not nearly as concerning for the technology industry as the broader trends driving the market downward.

“In the immediate near-term in Australia there shouldn’t be an obvious, direct impact,” he said late Tuesday afternoon. “But if in the medium term the economy slips into recession – and there are increasingly plausible indications that this could be a risk – the circumstances could be ominous.”

Many Australian technology firms are already skating on thin ice, he noted.

McDonnell expressed disappointment with the results posted by IT services firm Oakton yesterday, which reported declining revenues for the third consecutive year.

This was a cause of “some concern”, McDonnell said, as over the same period most listed Australian IT services firms (and their global peers) posted modest growth. Data#3, SMS Management and Technology and ASG had all reported single-digit growth, he said.

McDonnell expressed doubts Oakton could rebound to its forecast five to ten percent revenue growth for the current fiscal year in the wake of market uncertainty.

“My view is that if you can’t break even during the past three years, it will be harder to this year – at least as the world looks today.”  

BBY has subsequently revised Oakton from “buy” status to “underperform”.

“With global growth down, analysts will take a less bullish view for future growth prospects of companies in this sector,” McDonnell said.

“During the last downturn, there was a pronounced tendency for [end user] organisations to defer discretionary IT spending.”

The debt crisis could have the same effect, he said.

This time around, companies are unlikely to be buffeted by government stimulus spending.

McDonnell expressed doubts about US Government plans to introduce quantitative easing in the American economy to again attempt to boost confidence. Interest rates were already low, he noted, and there is little room for tax cuts when the issue at hand is government debt.

“The capacity for monetary or fiscal policy has already greatly been reduced”, he said.

Many of the same limits apply to the Australian Government.

Australia’s Treasurer Wayne Swan yesterday committed to returning Australia’s Federal Budget to surplus by 2012/13.

“We expect to come back to surplus as planned... but there is no doubt that global events have made that role harder,” Swan said.

But McDonnell said this task is “less likely to be achieved” if the United States falls back into recession and global markets respond.

“The [Australian] Government may look to IT budgets as one area to cut costs to help that case a little,” he said.

What do you think? Is this a temporary slip or are trading conditions again on the decline?