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Resources & technology - also impacted by broad sentiment Back  
Gerry Hennigan, who won the Technologyand Resources gongs in the Survey, on unique aspects of both sectors.
On a relative basis, it will hardly come as any great surprise that resource as a sector, and to a lesser extent technology, outperformed the broader market indices in 2007. While the share price performance of companies within both sectors are traditionally more volatile, 2007 proved to be just as eventful for the broader market and in particular for the perceived low-beta sectors such as financials. That is not to suggest that either has been immune to the general downturn, a point illustrated by the fact that the Nasdaq and FTSE 350 Oil & Gas indices are down 12 per cent and 15 per cent respectively at the time
of writing.

Broader comparisons aside, both sectors are fundamentally different from an investment perspective, resource being driven more by macro factors, whereas technology, while cyclical, is also, in our view, very market specific. In light of the above, the resource sector, and in particular stocks of the oil and gas variety, have experienced a sharp contraction in valuations in the early part of 2008. The basis for the move is market fears surrounding global economic growth and the consequent impact on demand.

In the prevailing sentiment, the market tends to indiscriminately punish across the sector with seemingly little variation applied on the basis of the risk profile of individual companies. Such risk can be quantified from a variety of perspectives the most simple being those with assets biased towards production as opposed to exploration.

Of the larger stocks under our remit, Tullow Oil and Dragon Oil both have production bases and are thus well funded at current commodity prices. Tullow, unlike Dragon, however, has an extensive exploration portfolio, within which roughly 70 per cent of the valuation resides. That bias towards exploration provides considerable upside potential, the downside being the prospect of unsuccessful drilling campaigns. A risked weighted approach to valuing exploration assets attempts to limit, though will obviously not eliminate, risk and hence Tullow of the two stocks in question would have a higher risk profile.

As a general rule, the constraints imposed by an economic downturn have obvious negative implications for corporate spending on technology. In such an environment, companies with entrenched customer bases tend, not surprisingly, to fare better, a profile that mainly fits the large, rather than small, evolving technology companies. That said technology is made up of a myriad of sectors, each at various stages of evolution, with different demand drivers and competitive pressures. A case in point is Norkom. Its customer base is made up almost exclusively of banks, which in the current environment would suggest an uncertain outlook. Underlying demand, however, is driven not so much by the banks but the regulatory environment. That, along with an expanding customer base, suggests growing market acceptance of Norkom’s product offering and apparent competitive advantage, despite market conditions. Hence, of the technology companies covered, all of which are of the small cap variety, it is our favoured technology stock.

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