IT's bright future looks assured - Business - News - The Independent

IT's bright future looks assured

WE KNOW about banking and engineering, two of the sectors most profoundly hit by the stock market crash. Less well chronicled is the extraordinary rise and fall of anything to do with information technology, a sector which has doubled and halved again over the last nine months.

Other examples of this double and quits again phenomenon include the telecom companies, Orange and Colt. Both shot up like Guy Fawkes night rockets, only to fall exhausted back to earth again. With the benefit of hindsight, it is possible to see in all of them the last speculative gasp of the stock market bubble, for very little else has changed for any of these companies other than the worsening economic outlook.

At Colt Telecom, the fault was partly a technical one. Only 25 per cent of the company's stock is traded, and as Colt approached entry to the FTSE 100, buying by index funds caused the price to soar. By the same token, index funds have begun to sell now that it looks probable Colt will drop out of the Footsie, causing the price to plummet with equal vigour.

At Orange the phenomenon was to some extent self-inflicted. The market began to believe the exaggerated claims of the company's managing director, Hans Snook, both on prospects for Orange and for mobile telephony generally. The awakening has been a rude one. Mr Snook is probably right about the very long term. The future is bright and some of it may be Orange. But he's ahead of his time.

For the IT sector, there are no explanations other than the obvious - that the sector became overbought and therefore over valued. At the beginning of this year, IT stocks got their own separate FT index for the first time. It is one of those oddities about investment that this in itself is generally enough to stimulate institutional interest where there had been none before.

Why it was that so many big investors failed to identify IT as a high- growth industry of the future before creation of the index is a question some might like to take up with their pension fund trustees. In any case, creation of the index became a defining moment and suddenly IT was the stock market's latest glamour sector. By the peak of the market in mid- July, the index had almost doubled. The sector even had its own representative in the FTSE 100, the computer software company Misys.

This stellar performance couldn't last, of course, and when the market began to stumble, the fall for IT was twice as hard. I've said this many times before, but the message is worth repeating; in these markets it is foolish to try and guess the bottom. IT stocks could as easily halve again as establish a floor at this level, such is the valuation madness afflicting stock markets. I cannot recall a time when the eternal question about financial markets - are they anticipating the future or do they determine it - was more poignantly put. The fundamentals of a company's prospects may not matter very much with markets apparently intent on plunging us all into recession.

Even so it is worth making some general points about prospects for IT, which, whatever your view of the long-term effects of the present crisis, are still outstanding. Remember, that even in the Great Depression of the 1930s, there were some new industries that thrived and grew. The magnificent Hoover building on the A40 out of London, now a branch of Tesco, is a lasting monument to one of them - high value consumer products.

To help do this, I've turned to two, very different representatives of the IT sector - Kevin Lomax, chairman of Misys, a computer software company specialising in systems for the banking sector, and Robin Saxby, chief executive of ARM, a newly quoted IT company at the frontiers of its industry as a designer of new-generation computer chips.

Neither of them is complacent about the turmoil now engulfing us but both of them make this point - some of their fastest-growing markets right now are Japan and South-east Asia, that part of the world economy already deep in recession. As for the West, there is absolutely no sign of a let- up in markets or growth. This could change of course, but there are some quite compelling reasons for believing it won't.

Of the two, it is plainly Mr Lomax who is most exposed, since a large part of his business is with the banking sector. During the last downturn in the early 1990s, it was IT departments and spending that took the brunt of the cutbacks, both in banking and in the corporate sector more generally. But this time round it may be different, however bad the losses in the banking system get.

There are two immediate reasons for this. First, banks are going to have to keep spending heavily on the millennium bug, if only because it could prove suicidal to stop. Second is another batch of "must" spending - on preparations for Emu.

Perhaps more important, however, this priority spending has caused a big backlog of other IT projects to build up, which should help sustain the industry long into the next century. This spending could indeed be cut, or further delayed, but since financial services now operate in a much more competitive environment than they did, this doesn't seem likely either.

If established banks want to stay in business, faced with the competitive challenge of low-cost newcomers like Virgin and Tesco, they have to modernise, cut costs, improve on the efficiency of their delivery systems and generally shape up. Only those with strong IT strategies will remain competitive. The upshot is that spending on IT should continue to grow, even during a pronounced downturn in the banking cycle.

As a designer of chips, ARM is in a very different area of the market, but some of the same factors apply. Nobody can have failed to notice that there is a terrible cyclical downturn in the memory chip market under way; repeated factory closures tell the story. But ARM is thriving, because if they are going to survive, chip manufacturers need new designs and new products to fill their empty production lines with.

The movement away from desktop computing to mobile information technology has already created a momentum all of its own which is highly likely to be resilient to economic downturn. Certainly it is proving to be in the Far East, as is the switch across a range of technologies from analogue to digital. All this is going to help sustain the chip and software industry, regardless of economic slowdown.

We must assume that, bad though things might get, we are not witnessing the end of capitalism in the present meltdown. For those prepared to take a 10 to 20-year view, IT is the sector to be in as an equity investor.

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