City & Business: Century ends with a goldrush

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The Independent Culture
With the new century comes an industrial and technological revolution. That, in any case, is the way the stock market sees it as we enter a new millennium. It is hard to pin point exactly when the mania began, but in the last two months of 1999, anything to do with technology, the Internet and communications found itself in fevered demand.

In scenes reminiscent of a 19th century gold rush, their shares soared to valuations never before tested in the annals of stock market history. Nor was this just a localised phenomenon: to a greater or lesser extent, it occurred across the globe.

It somehow seems a fitting conclusion to the old century to end in a mood of extraordinary optimism for economies in the developed world. In the US, few are prepared to predict an end to the economic expansion, already the longest uninterrupted period of growth inhistory. Everyone, it seems, has become a believer to some extent in the transforming powers of the "new" economy and the Internet, making possible an indefinite and golden age of low inflation and strong growth.

That's how it looks at the end of the year, but it wasn't always like this. Although stock markets around the world have ended at or close to record highs, this has been a spectacularly turbulent year for many businesses. While hi-tech stocks have soared, many established companies with no clear strategy for exploiting the Internet or migrating their businesses onto it have seen their share prices and trading performances bomb. Indeed, up until the share buying frenzy of the final two months of the year, it looked as if the London stock market would overall end in negative territory.

Rewind to the start of the year, and the picture was very different. Many were still predicting a recession in Britain. Pundits were also generally forecasting an end to the US expansion. Some went further to predict a Wall Street crash, similar in scope and effect to the one that engulfed the Japanese market at the tail end of the Eighties. The catalyst, they said, might be the millennium bug, or at least the fear of it.

None of these predictions came to pass. The UK economy has rebounded strongly, so much so in some quarters that the Bank of England has been forced to start raising interest rates again. The extraordinary expansion of the US economy continues apace, US stock markets remain buoyant, and there has been virtually no sign of disruption from the dreaded millennium bug - well not yet, anyway.

Four big themes emerge from a year that was rich in vicissitudes for business - the Internet, Armageddon on the high street, merger mania and the rebirth of the small retail investor.

First, and most significant, this was the year in which the Internet came of age, the year when established businessmen and investors finally came to realise that the net wasn't just for dudes with pony tails, but was about real business, from construction to distribution and from media to engineering - and worse, that those who fail fully to embrace it will wither and die.

The astonishing success and subsequent flotation of Freeserve said it all. To allow the Internet service provider to float at all, the stock exchange had to lift the rule that stipulates companies coming to market must have a five-year track record. Freeserve, invented and developed by the high street retailer Dixons, was less than a year old when it floated, and as such was powerfully indicative of the speed of development in these industries and the irrelevance to them of many of the old market and business rules. Less than six months on, Freeserve commands a stock market valuation which is higher than some FTSE100 stocks and it has vanquished the sceptics, both of its business model and its flotation value.

For Sir Stanley Kalms, chairman of Dixons and one of the grand old men of retailing, Freeserve has allowed the sort of second coming that most businessmen can only dream of.

The same cannot be said of most high street retailers, for whom 1999 has been a truly awful year. Worryingly, virtually none of the pain is yet due to the Internet, or at least not directly, for although e-commerce is expected to grow at a phenomenal pace, it has yet to take a significant proportion of retail spending.

Rather, the killer factors for retailers have been stable and falling prices, changing spending patterns and failure to move with the times. Perhaps hardest hit of all by these trends is poor old Marks & Spencer, less than two years ago still widely described as the "doyen" of British retailing. The fall from grace has been terrifying in its speed, and despite the tens of thousands of small investors who have bought into the shares in the hope of a speedy turnaround, there is little sign of better times to come.

Into this malaise on the high street has stepped a new generation of faster moving retailers - names like Matalan, a discount retailer of designer clothes, and GAP, foreign-owned and fashionable. But these are very much the exceptions in a market place which for the first time in recent memory remains stubbornly resistant to any kind of price inflation. Lack of pricing power has been compounded by a pronounced switch in spending patterns. Today's young consumers are much more likely to be spending their money on eating out, mobile phones, PCs and the Internet than M&S woollies.

Mobile phones have come to represent another big "theme" story of 1999 - the continuing saga of globalisation and consolidation. Mobile telephony started out as a series of closely guarded national franchises. Today these are being stitched together into continental, or even global networks.

Britain's Vodafone has been in the vanguard of this process, starting the year with a $60bn bid for Airtouch of the US and ending it with a still unresolved pounds 82bn assault on Germany's Mannesmann. As the first hostile bid from a foreign company on German soil, the Mannesmann battle has taken on a wider significance. Is the process of globalisation about to penetrate even Germany's heavily guarded national defences?

The rapid growth in mobile (Finland's Nokia this year became the most highly valued company in Europe at euros 220bn) is only one side of the telephony success story. With demand for "bandwidth" expected to rise exponentially as the "new" economy takes hold, fixed-line providers such as Energis and Colt are seeing equally explosive growth. Even the old established national monopolies like British Telecom, are reaping the rewards of being part of a boom industry.

Telephony and technology stocks have been outperforming the rest of the stock market for several years now, particularly in the US, which lays claim to Microsoft and most of the other giants of the new economy. Yet for the London market, at least, it was not until November that the real feeding frenzy in these stocks began. In the main, this has been caused by a sudden and quite unexpected surge in retail buying from private investors, dealing mainly online through the new legion of Internet brokers.

At this stage it is hard to tell how durable a phenomenon this is. Some see it as a disaster waiting to happen. The little man tends to pile into stocks and shares in the final throesof a bull market, only to become badly burnt on the way down. Certainly the indiscriminate pursuit of speculative "new" economy companies is the closest thing the stock market has seen to a mania since the bio-tech bubble of the mid-Nineties, and this one is a lot bigger.

Strangely, the non-existent millennium bug may have contributed to the investment boom. Central bankers, and particularly the Federal Reserve in the United States, have been injecting extra liquidity into the financial system in anticipation of a run on cash as the millennium approaches. Some believe this has helped stoke the stock market frenzy. If true, we can expect a bad hangover as central bankers claw back the giveaway in the immediate aftermath of the new year.

Whatever the vagaries of the stock market, there is good cause for optimism about the new century. Inflation is low, growth is strong, and there is little reason to suppose this benign combination is going to come unstuck any time soon. A business and technological revolution of undoubted significance is meanwhile unfolding before our eyes, helping to keep prices low, improve choice and generally enriching the population. We live in exciting times.