Is normal service resumed? Markets surge as the blue chips bite back – and dot.coms dwindle
Heather Connon
It is a corporate remake of The Empire Strikes Back. Just 10 days ago a clutch of new technology stars soared into the elite of the FTSE 100 index. Since then, the shares of Freeserve, Psion and Kingston Communications have plummeted by more than a third, and even Baltimore Technology has lost more than 10% of its value.
That has been mirrored by a revival in the fortunes of those who made way for the upstarts – bastions of the old economy such as Imperial Tobacco.
That trend was repeated across the markets in both Britain and the United States. In London, the Techmark 100 index of leading technology stocks is more than 15% down on its peak, while Nasdaq, its US equivalent, has dropped more than 5%. The FTSE 100 – which does not officially welcome the new entrants until tomorrow – and the Dow Jones surged.
So far, the decline in technology shares is little more than a puff of air escaping from the balloon: even after last week’s fall, the Nasdaq has doubled in little over a year; Techmark has done the same in less than six months.
But is it a portent of a bigger shake-out to come? There are still few commentators prepared to predict that a technology crash will happen, let alone when it will come – although practically everyone agrees they look dramatically over-valued. Likewise, although everyone agrees there are real bargains among shares in the old economy, no one is expecting them to power ahead.
Statistics from Warburg Dillon Reed illustrate how the new economy has come to dominate the market: stripping out technology stocks, the FTSE 100 index has fallen by more than 20% in the past decade, most of that decline in the past three years.
“The gap between old and new economy stocks is now too stretched,” said Steve Russell, strategist with HSBC London. “But remember that the technology revolution is for real. We recommend that people switch from the broad-brush approach of thinking if it’s technology you have got to have it, and get into the winners and out of the losers.” He admits that, like everyone else, he has no idea who these will be – and even if he did, they would already be on stratospheric valuations.
“The best guide is to look for companies with barriers to entry. On the Internet, there are none. In software and telecoms, there are strong barriers.
“Vodafone and perhaps Sema do have a chance of justifying their valuations.”
Ian Scott of Lehman Brothers thinks these stratospheric valuations have put the British market out of line with the US. “Nasdaq is up 16% so far this year, while the [similar] European Neuermarkt has risen 76%. It has not been appreciated how much bigger the rotation [from old to new economy stocks] has been in Europe compared with the US.”
He points to specific sectors, such as telecoms – where European shares have jumped by 26,5% so far this year, compared with a 7,1% fall in the US – and media, which has almost doubled in Europe but fallen by a quarter in the US. He believes there could be some selling of new economy stock, such as Reuters, which has risen 70% this year, far faster than any of its US peers. Some attribute the decline in technology stocks to the flotation of lastminute.com. Despite scepticism in the City, it was comfortably subscribed, but those who bought hoping for a quick profit were disappointed as the shares fell sharply during the week.
“It is unlikely that either institutions or private investors will see it as a one- way bet any longer,” said HSBC’s Russell.
Dissatisfaction with the lastminute.com flotation, coupled with share price weakness, has already produced casualties. Financial Objects, another technology company, has scrapped a flotation planned for next week.
Last week’s flurry of interest in old- economy stocks went only a little way to reversing more than year of declines in their shares. But analysts warn that not all cheap stocks are bargains.
Michael O’Sullivan of Warburg Dillon Reed points to companies with consistently good results and strong positions in their markets, such as GKN the engineer, CRH and BAe.
He likes technology stocks but says: “As for Freeserve and lastminute.com, we say waitaminute.com.”
HSBC’s Russell looks for industries unlikely to be changed by the Internet, such as life assurance, drinks and food firms: “It is difficult to see how the Internet can stop people eating and drinking.”