FTSE 350 software and computer services: IT set for spending comeback

As it happened, worldwide IT spending did continue to tick up in 2012, although software vendors had to venture east into faster-growing emerging markets to find the fastest rates of growth. Mainframe specialist Micro Focus (MCRO), for one, saw weakness in its core US business offset by rapid growth in Asia Pacific, and it was a similar story at Fidessa (FDSA) – the financial software group. It also generated strong sales growth in the Far East, but suffered a 6 per cent sales fall in the eurozone, its biggest market, where the ongoing financial crisis continued to hit IT budgets in the industry.

However – and, while technology research and advisory specialist, Gartner, believes that economic uncertainty is still the greatest constraint on IT spending growth – signs that the worst troubles may be over could see spending bounce back in developed economies this year. It predicts that spending on enterprise software will grow faster than any other category, with IT services also likely to see a jump in growth after a muted 2012. That's good news for Computacenter (CCC), which is dependent on growth of its services business to overcome weakness in its supply chain operation. That business still generates the bulk of its sales distributing devices to businesses in the UK and Germany, and suffered a nasty slump in 2012 as a result of eurozone troubles.

The rapid growth of digital content and services for consumers also continued, helped along by the steady adoption of data hungry devices and 'cloud'-based services. That's good news in particular for data centre operators such as Telecity (TCY). In fact, its main problem is keeping up with the seemingly insatiable demand for server space – it's having to accelerate investment in capacity, both organically and through acquisitions, and that meant debt rose sharply throughout 2012. So, while the company is very profitable and strong cash generation means it has started paying dividends, the shares are priced for perfection on a forecast PE ratio of almost 30. Broker Espirito Santo believes this rating is reflective of the fact that demand across the industry has outstripped supply, and pushed prices up, and that a return to a more balanced market this year could see the shares come under some pressure.

Elsewhere, much of the sector's outperformance was down to its largest constituent, Invensys (ISYS) – arguably as much an engineer as a software company. Its shares trod water for most of the year, only taking off after it sold its rail division to Siemens for £1.7bn, prompting a chunky return to shareholders, but still leaving the group with net cash and solving its difficult pension problems in the process. That clears the way for a takeover of the whole group – and with a number of large possible bidders such as GE and Honeywell already known to have been sniffing around, we're confident that our selection of it as our Takeover Tip of the Year could prove a winner.

Even if a takeover doesn't materialise, there's every likelihood that a slimmed down Invensys will prosper in its own right this year. The rail disposal leaves it with a business focused on selling higher-margin industrial controls to manufacturers and energy producers, sectors that are poised for a rebound in spending this year. Similar niches are also proving profitable for Aveva (AVV), which sells the computer-aided design software used to design sophisticated industrial plant. Recent signs that China's mini-slump of 2012 may be over, with purchasing managers' index readings moving back above the all-important 50-point mark and into growth territory, sets the scene for further progress from both companies this year.