High-technology shares risk sunburn

VIEW FROM MANHATTAN Sky-high prices in Wall Street's boom sector are prompting investors to cash in their chips

Like Icarus in Greek mythology, share prices in New York have soared to the sun, setting fabulous records this year and the wax that has kept their wings in place has been the super-buoyant technology stocks.

The flight path has began to flatten of late, however. Is the wax finally starting to melt?

The first signs of trouble came on 19 July when over two hours in the middle of the day the stock market here briefly lost 100 points, although it did go on largely to recover. The blip, which spurred fears of an imminent overall market correction, was triggered mostly by a sell-off of technologies. Since then, those same stocks have been wobbling alarmingly.

That day's brief panic was set off by comments from two high-tech giants, Intel and Microsoft, expressing bewilderment at the distance their own shares had travelled over the first half of this year. The message was clear: the high prices of the stocks at least of these companies were beginning to seem out of step with what management could realistically deliver. Microsoft, whose chairman is Bill Gates, was keen in particular to play down the stratospheric expectations for its new versions of the Windows PC operating system, due out on 24 August.

The momentum in technologies over recent months has been astonishing. According to the Standard & Poors Technology Index, high-tech stocks were up 37.9 per cent over the year through the end of June and they continued to climb thereafter. Over the same period the benchmark Pacific Stock Exchange technology index was up 86.2 per cent. The Philadelphia Exchange's semi-conductor index is up more than 100 per cent over 1994.

Many of America's mutual fund managers have been betting heavily on the technologies sector. A survey by Morningstar Mutual Funds, a Chicago-based fund tracking service, showed the average diversified US stock fund had placed 16 per cent of its assets in technology stocks.

Even a perfunctory scan of the US economy in 1995 explains all the excitement. From whatever angle you choose, the part played in it by the high-tech companies, particularly makers of chips and personal computers, looks more impressive almost by the day. Consumers in the US are expected for the first time to spend more this year on personal computers - some $8.8bn - than on television sets. The arrival of Microsoft's new Windows 95 will be a factor spurring their appetite as they rush to update not only their software but in many cases their hardware, too. Meanwhile, spending by businesses on computers and software is expected to account for 8 per cent of the nation's gross domestic product this year. Makers of semiconductor chips in the US are struggling to keep up with demand, throwing up new factories faster than mushrooms can be cultivated in the shade.

Edward Yardeni, chief economist at CJ Lawrence in New York, argues that the US is only at the start of an enduring high-tech revolution. "I believe that high tech will become an even more significant sector of the economy," he declared. "In effect, the high-tech revolution has created a fourth factor of production - information. The original three factors are land, labour and capital."

But still, the recent faltering among the technology stocks has prompted some investors and fund managers to reconsider their exposures. A few have already acted. The Walter Pincus Growth and Income fund, for instance, recently cut back from 40 to 3 per cent its proportion of high-tech stocks. If other big funds jump in the same direction all at once, the Dow Jones, and more particularly the Nasdaq, which is heavily weighted with technologies, could be in for a nasty surprise. Analysts draw comparisons between the technologies in 1995 and oil stocks in the early 1980s. As demand for energy soared, there was a belief that the oil sector was invulnerable and could only climb. Eventually, of course, gravity triumphed.

Historically, technology stocks have generally undergone a 10 per cent correction every year. Most analysts expect roughly the same sort of adjustment to happen soon, though a few expect the bubble will burst more dramatically, perhaps cutting valuations by 20 or even 50 per cent.

William Raftery, a technologies analyst at Smith Barney, believes the process has already started. "We think it is going on already and we would not be a bit surprised to see the market coming off quite a lot more," he says. However, he does not subscribe to the disaster scenario of a sudden plunge. "There is nothing real for investors to panic about. I think this is going to be more of a drip-drip correction."

Among the factors creating the new chill are worries about a threatened Justice Department investigation into one feature of Microsoft's new Windows system that would allow users to connect instantly to a new on-line service developed by the company to compete with existing on-line providers such as CompuServe and Prodigy. Much more relevant, however, is the collective decision among funds and investors that the time has arrived, with prices so high, to start cashing in their chips. "There are huge profits out there," Mr Raftery says. "I know greed when I see it."

These jitters may yet pass, however, particularly if the Windows launch goes off without an oar being thrown in by the Justice Department. Nor can the fate of the technologies be decoupled from all the other factors affecting the mood on Wall Street, above all else by what Alan Greenspan, the Federal Reserve chairman, decides to do with interest rates.

If the bullish sentiments that have dominated Wall Street this year can be sustained, high-tech stocks might avoid melt-down. But it is probably safe to assume that even in those circumstances their performance in the second half of 1995 will be much less breath-taking.

David Usborne

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