Sarah Bullen
TAKING STOCK
Any niggling doubts that global investors have actually gone bananas would have been fairly decisively cleared up by recent media footage from Hong Kong. The images showed hundreds and thousands of people queuing and jostling in lines that snaked around countless city blocks.
The excited, bordering on belligerent, throngs were not queuing for the new Sony PlayStation, however. They were lining up, in some places 50E000 deep, to buy shares in a new Internet venture called Tom.com.
Tom.com was little more than a name, a website and a lofty promise to become the Time Warner of Asia. The venture, however, had the backing of Li Ka-shing, Hong Kong’s most powerful tycoon, and a shareholder in the stellar Pacific Century Cyberworks. It also had the right suffix: dot.com.
Welcome to the new economy where one-day’s gains after a stock has been floated can be in excess of 400%.
South Africa has watched in stunned silence as Net nerds rose from what seemed like every other garage in the United States to make millions overnight. The Shuttleworth family garage in Durbanville coughed up an indigenous Net entrepreneur in the person of Mark Shuttleworth, who sold his e-commerce security Thawte for a tidy sum expected to be in excess of R5-billion.
But South African markets, on the whole, have been more voyeurs than active participants in the Internet gold rush, watching as the dot.com frenzy stormed the US before moving across the Pacific to Asia.
Last year alone, New York’s technology and Internet nirvana, the Nasdaq, soared 85% – fuelled by $70-billion in new floats. Last week it bulleted past the 5E000 mark for the first time.
Investors and economists spent the better part of the 1990s debating whether there was actually a new economy, or whether a dazzling, but short-lived, visitor was temporarily obscuring the traditional economic cycle of peaks and troughs. The question was, can it last?
Naysayers dominate the early debate. With stock valuations so high on the basis of little more than a promise, it seemed almost a sure bet that the market would face a correction. Sanity must win over hormones, said commentators, pointing back nervously to 1929 when, in two days, the world markets crashed, wiping out $14-billion in market value built on a speculative frenzy. Again in 1987 the market crashed. This time it took a single day and wiped out more than $500-billion in market value built on another speculative surge fuelled by corporate takeover and junk bonds.
But the new economy has taken no heed of warnings that would detract from its celebrity, least of all US Federal Reserve chair Alan Greenspan’s attempts to take the tiger out of the economy with interest rate hikes.
More than just lasting, the Nasdaq’s successes have totally eclipsed the traditional cycle of rises and dips, and rewritten the law of gravity that dictates that what goes up must come down. Commentators have been forced to re- evaluate the foundations of the new economy time and time again, as it passed the 3E000, 4E000 and now the 5E000 mark.
And still the new economy cannot quieten the nagging doubt: what if the bubble bursts?
“Make no mistake,” said Barnard Jacobs Mellett head of dealing, Kevin Brady, “if the bubble burst it would impact the whole world.”
South Africa, however, may be in a far better position than new economy global markets to deal with the fallout that will ricochet around the world.
For starters, South Africa has been slow off the starting block to capitalise on the new economy and the slavering hunger for technology stock.
It remains a resource and commodity-based market with over two-thirds of the Johannesburg Stock Exchange’s (JSE) market value entrenched in the geriatric equities. Over one-third of the market is resource- based. Another third belongs to the financial and banking sector, which is large, strong and sophisticated, with over R500-billion sitting in its asset and liability book.
IT stocks account for only 8% of the market. This means that even if the Nasdaq lost half of its value in a day, pulling the South African technology sector down with it, the overall JSE would lose 4% of its market value.
“While those losses could be catastrophic to a number of investors and firms, the bulk of the overall market would not be impacted too heavily,” said ING Barings head of research Stewart Thompson.
He added that the hurt would be spread out among investors. Hardest hit would be portfolios that are overweight, or solely focused, on the IT sector. But pension funds, unit trusts and investment instruments that generally mirror the overall market will see the impact in the 8% of their investments that are in tech stock.
Of course, Thompson concedes, this is a best-case scenario. More likely the fallout from the possible demise of the new economy would not be confined to tech stock and would be infinitely more far reaching in its impact on the global market.
This would not count in South Africa’s favour. The country’s markets more often take their cues from New York than domestic indicators, and a strong economic outlook and lower interest rates would be unlikely to be enough to counter the toxicity of the crash. It could contaminate the broader market, leaving more than just IT pundits contemplating strangling themselves with their mouse cords. The resource-driven focus of local markets has also been blamed for the JSE’s sluggish performance this year.
The new economy pull factor has seen investments flowing out of commodity stocks and into IT, with international investors eyeing new economies such as South Korea, Taiwan and Latin America. On Monday the JSE’s resources index reached its lowest level in eight months after slumping 4,63% on the day. Economists were quick to point out that IT-heavy emerging economies are proving more luring to investors than South Africa.
And yet, even the largest new economy shares, Didata and Datatec, lost ground. Didata lost 2,27% to R64,50 while Datatec slipped 5,52% to R130.
By the same token, if the bubble does finally burst on the new economy, economists are fairly certain that the flow of money would turn back in favour of resources.
“Funds will flow back into a safe haven,” said Barnard Jacobs Mellett dealer Andile Mazwai, “and that is likely to be resource stocks.”
At the moment local blue chip resource firms like Sasol, Amplats, Implats and Billiton are looking ridiculously underpriced. “They are literally screaming value,” said Mazwai.
Screaming they may be, but far more attractive at the moment is the dangerously seductive dot.com dance.