Heather Connon
SHAREWORLD
When FTSE International meets on March 8 to decide who is in and out, up and down, in the London stock market, construction company BICC’s lowly 330-million market capitalisation means it could be demoted to the small-cap index – of the smallest companies in the market. But Baltimore Technologies, a supplier of secure systems for the Internet and now worth 3,4- billion, could be elevated to the FTSE 100 index – of the largest ones.
Yet eight years ago, BICC sat squarely in the FTSE 100. Last year its sales totalled more than 3-billion, and its profits are likely to have been more than 50-million.
Baltimore is better known as a city on the east coast of the United States than as a business. This is hardly surprising given that, until last December, the company was in the FTSE Fledgling index of those too tiny even to count as small. Its total sales last year were probably less than 25- million and it lost a similar amount.
BICC and Baltimore are just two of the more extreme examples of the split that is emerging in the stock market between new and old economies. Any company associated with the new technologies of the Internet and the cellphone are in huge demand. What has been attracting less attention, however, is the knock-on effect of this on the constituents of the old economy.
Whole swathes of the stock market, including such sectors as retailing, property, engineering, construction and leisure, are being largely ignored by investors desperate to put their money into high technology.
The plunge looks as though it is accelerating. Last week alone, companies such as BICC, Mayflower, and BBA lost more than 10% of their value – yet nothing within them had changed.
The falls were blamed on Vodafone. Victory in its bid for Mannesmann means that it will now represent 14% of the FTSE 100 index, and many institutions found themselves short of shares. To get their weightings up, they had to sell something, and it was old-economy stocks that suffered.
But last week’s moves were part of a deeper rebalancing of investors’ portfolios. They are looking to the future, concluding that the Net is changing everything. Inflation is disappearing and the Web is adding to that pressure.
Companies in the old economy can no longer rely on pushing through price increases to drive their profits up. But few of them can bank on volume rises either: businesses such as chemicals, retailing and much of the rest of manufacturing industry are seeing low growth, or none at all. The only way to keep profits growing is to keep costs falling – hence all the mergers among old- economy companies.
Companies in the new economy, by contrast, are growing fast. Baltimore may not be making profits, but it is expected to almost double its sales this year. London is banking on that sales growth eventually translating into healthy profit rises. But the change has taken many investors by surprise. Their portfolios are still heavily weighted to the old economy, and they are struggling to increase their exposure to the fashionable sectors.
Dresdner Kleinwort Benson calculates that, at the end of September (the latest figures available), British institutions were 10% underweight in both telecommunications services and software and its services.
By contrast, they were at least 30% overweight in old-economy sectors such as construction, packaging and cars. Funds without a sufficient weighting in new economy sectors – and that includes almost every institution – are underperforming, and rushing to buy. The greater the rush, the more prices rise and the more stock the institutions need to get their weightings right.
David Rough, group director of investments at Legal & General, says it has become irrelevant whether technology stocks will perform well enough to justify their share prices. “Given how funds have performed over the past two years, you cannot justify not holding these stocks. If your job, your bonus and your performance are measured on how well you are performing, you can’t go on saying the emperor has no clothes forever.”
And he points out that the performance of some of the engineering stocks had been poor, while many were simply too small to attract much attention. To reverse the declines, they had to do something, such as buy in their shares or merge with rivals. If they survive long enough, that is: recent French bids for Marley and Blue Circle underline how vulnerable the old-economy companies have become.
A growing number of commentators think the rise in technology stocks looks like a bubble, and warn that it will burst. That may be bad news for investors who have paid inflated prices to get their hands on technology shares, but it probably means shares in the old economy “will not fall as fast”, said Rough.
“Sure there is a bubble,” said Andrew Lapthorne of Dresdner Kleinwort Benson. “But it still makes more sense to be invested in the bubble companies than it does in the old-economy stocks.”
That may be true for the fund managers: if they continue to avoid technology stocks, they may be out of a job when the bubble bursts. The rest of us, whose pensions and savings are funding the institutions’ dash for growth, may be less lucky. We could find ourselves holding the booby prize.