The software sector was a safe haven for much of 2007. But as the credit crunch bit in earnest, fears of a slowdown in banking IT spending saw a substantial and indiscriminate de-rating of tech stocks. Even if the financial services sector's woes suddenly improve in 2008, investment banks' IT budgets are looking tighter than they have done for several years.
Financial services are estimated to make up around 20 per cent of global IT spending. For now, most companies are sticking to the line that they wouldn't want to dismiss the threat but aren't seeing any slowdown yet. While chief executives acknowledge the risk, few put their own companies in the 'discretionary spending' bracket that's seen to be most vulnerable. But discretionary may mean anything except technology which supports compliance with regulations such as Reg NMS (though Mifid spending is tailing off) and electronic trading platforms that enable banks to branch out into markets beyond the stock exchanges. That could leave highly-rated Fidessa, as well as smaller providers Patsystems and Ffastfill, better placed than IT services providers such as LogicaCMG and Detica, who have already warned of difficult UK markets.
While the move away from internally developed software towards pre-packaged applications is one of the biggest IT trends of recent years, banks remain one of the biggest spenders on home-grown software. Testing that code is one of the more rudimentary aspects of the development cycle, and easiest to outsource, so testing specialists SQS and NCC may benefit as IT departments look for better ways to use fewer staff. NCC also provides a broader range of security functions - another market where spending is likely to remain steady, especially with the spectre of tighter data protection laws following HM Revenue & Customs' loss of 25m personal files.
Elsewhere in the software market, results from the likes of global giant HP suggest demand remains stable. However, a wider economic slowdown would put IT departments across all industries on the defensive.
