Painful first half for our share portfolio

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Generations of stock market sages have warned investors not to attempt to catch a falling knife. In compiling The Independent's New Year share portfolio, we ought to have paid more heed to that old adage.

Generations of stock market sages have warned investors not to attempt to catch a falling knife. In compiling The Independent's New Year share portfolio, we ought to have paid more heed to that old adage.

Instead, we gave our share tips a New Economy flavour that has seen the portfolio's value sliced by a quarter. At the halfway stage, we are down 27 per cent, compared with the FTSE All-Share's decline of 9.4 per cent.

They are stark figures. Three out of the 10 stocks have outperformed the London market; just two are showing gains on their December closing price. A string of profit warnings – from Bookham Technology, the telecoms equipment maker; Capital Radio, the broadcaster; and nCipher, the internet security software group – show that the investment community as a whole was too optimistic about the outlook for many of these companies. But we take no comfort from being in good company in our misjudgments.

The All-Share has lost more value in the first half of this year than it did in the whole of 2000, as rising debt levels crippled the telecoms operators and the beneficiaries of their capital expenditure, the equipment makers, saw demand shrivel. As a result, the global economy has slowed more sharply than we anticipated, and growth stocks have languished.

In fairness, we did warn that the first week of January was unlikely to be the best time to pile back into equities; we said there could be another six months of turbulence. While we are now more bearish on the outlook for corporate investment and increasingly nervous for the global economy, as rising unemployment threatens consumer confidence, we continue to believe that there is hope for a limited second-half recovery in some of the stocks that have proved such a disappointment to date.

The dramatic steps that still need to be taken to end overcapacity in the telecoms equipment sector could yet prove beneficial to Bookham Technology. The company, which makes optical components for telecoms networks, has seen sales halve in just the last three months, and there is no sign of an upturn before the year-end. The shares are our worst performer, down 78 per cent. But as operators club together to reduce capex, equipment makers, too, might begin to consolidate. Bookham's impoverished shareholders might as well stick it out in the hope of a bid.

Software firm nCipher might not be so lucky, as the collapse in IT spending spreads from its US markets to Europe. Intechnology, though, has just launched a new data management product with the backing of Compaq's UK distribution network, which could help offset the slowdown. The little AIM stock is one of our outperformers and remains a speculative buy.

Scipher, the intellectual property firm, has fared less happily but is well placed to benefit when scarred investors drift back into technology stocks. That process is sure to be cautious, and Scipher allows the spreading of risk, since it is working on an array of research projects – in electronics, magnetics and optics – based on its own IP and in partnership with others.

Canada's Ballard Power Systems, our overseas stock pick, has also lost value in the technology sell-off, but we remain optimistic. It makes engines powered by fuel cells and has secured more orders from Nissan and Honda. The US government has also proposed a tax credit to encourage the use of cars powered by fuel cells rather than petrol.

The outsourcing giant Capita is very well placed to pick up contracts in education and health, as the Government opens the door to private-sector involvement in these services over the next few years. The company offers services stretching from payroll management and benefit payment systems to the public sector, and its recent investor day highlighted its progress in picking up contracts from the private sector, too. The battles to come over private involvement in the public sector should increase Capita's profile and help investors to swallow what remains a high rating compared with its peers.

The Government is unlikely to be so helpful to Capital Radio. This was a risky choice, with advertising revenues trending down, and we underestimated the extent to which the problem went beyond the broadcaster's advertisers. But we had hoped that the promise of media ownership legislation would free up Capital to extend its broadcasting empire. In the event, last week's Queen's Speech contained only the promise of a draft bill in this parliamentary session, and we await the return of Capital's consolidation premium.

Consumer stocks have been the real stars so far this year, and First Choice Holidays gave a lift to our portfolio. The tour operator has just reported an in-line loss for the first half; the second half includes the summer holiday season, for which bookings are looking very healthy. The macro-economic backdrop remains positive, as consumer confidence is buoyed by the Bank of England's pre-emptive interest rate cuts. And the tour industry itself has reduced capacity this year, with First Choice deciding to focus on niche holidays.

British Biotech, too, continues to reward our optimism. The failure of its Marimastat cancer treatment clears the way for a new focus on its pipeline of six drugs. Results due within weeks should detail their progress.