No respite in sight for battered tech stocks

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The Independent Online

With each passing day, investors are prepared to accept ever lower prices for the sunken New Economy shares that sent the stock market to record highs in March, even if it means realising massive losses. Why is Tech Wreck proving so persistent?

With each passing day, investors are prepared to accept ever lower prices for the sunken New Economy shares that sent the stock market to record highs in March, even if it means realising massive losses. Why is Tech Wreck proving so persistent?

Traditionally, the last quarter of the year sees a period of weakness in the stock market that concludes with a year-end rally. But the negative sentiment dogging technology, media and telecoms (TMT) stocks is threatening to make this year different. Indeed, for the first time since 1994, the FTSE 100 looks set to end the year down on its opening level in January.

After the dramatic sell-off in technology shares in March, the bargain-hunters came out in force. But a spate of profits warnings this autumn from most of the leading lights of the Nasdaq has left the even the bargain-hunters nursing ugly losses.

In the past week, hopes that a year-end rally would rescue investors have evaporated altogether, leading to significant and successive daily falls - of between 5 and 10 per cent - in some of the biggest names of the New Economy. City soothsayers now say New Economy shares are unlikely to recover until March next year at the very earliest. Until then, further falls can be expected.

Steve Russell, equity strategy at HSBC, says: "There's still a herd mentality. If some else is dumping stock, that'll hit you, so you sell too. Despite the falls, lots of these stocks remain too high on any rational valuation."

Behind the recent wave of selling is quite simply a loss of patience on the part of fund managers who have been waiting for the tech stocks they have owned all the way down to recover. The sound of towels being thrown in has become deafening.

"Every man and his dog has been expecting a fourth-quarter rally, but it just hasn't happened," says Plum Shipton, a strategist at Merrill Lynch.

Ali Nokhasteh, a strategist at Goldman Sachs, says: "When you've got a stock that's lost 90 per cent of its value, you give up hope. Investors are just now realising that they paid an excessive amount for these stocks, that it was a bubble."

The situation is the opposite of that at the peak of the tech-share boom in February, when many fund managers gave up waiting for expensive tech stocks to fall and, panicking over their performance against rival asset managers, piled in at the top of the market. Meanwhile, debates have opened over whether the semiconductor industry will suffer a slowdown as telecoms companies cut back on capital expenditure next year.

Valuing New Economy companies has not got any easier.

"We didn't know how to value these shares when they were going up, other than relative to each other, which stoked the momentum. It's the same when things are going down," says Angela Dean, technology analyst at Morgan Stanley Dean Witter. "There are a lot of questions surrounding these companies we just can't answer."

Mr Nokhasteh says: "These are new industries and new standards are being set. Companies are spending a lot of money with no guarantee their technology will become the standard. Investors are realising that New Economy's very exciting but also that it won't put bread on the table tomorrow. It's the future, but not the near future."

Compounding the nervousness are concerns about high interest rates - the age-old enemy of equities, especially high-risk stocks like tech shares. Industrial production is accelerating faster than its historic trend, putting upward pressure on wages. "Either consumers will have to pay more, or companies will have to cut margins. Either way it's bad," says Mr Nokhasteh. "Even after cycle peaks, rates can go up for 12 months afterwards." HSBC's Mr Russell agrees. "Inflation is the banana skin. It's not as clear now that interest rates will be cut mid-2001."

That has left investors desperate to build up holdings in defensive stocks - food producers, tobacco groups, and pharmaceutical companies - that thrive in jittery times. To raise the cash to buy them, the techs have had to go.

So is there any hope for TMT? Ms Dean reckons that concerns over a slowdown in technology earnings are overdone. "In some of the most exciting technologies, such as fibre-optic networks, Europe lags the US," she says. "It doesn't necessarily follow that a slowdown in the US means one will follow here."

Richard Kersley, a strategist at Credit Suisse First Boston, says a cut in interest rates could spur a revival. "If anything, the Bank of England would be the first to move," he says.

Some strategists believe a confirmation of the US election result could spur a year-end rally. But others are much more pessimistic. Mr Russell says tech shares will overshoot their fair value on the way down just as they did on the way up. "It's hard to see a trigger for them bouncing back in the near-term."

For Mr Nokhasteh, only surprisingly good earnings reports next year - which he does not see as likely - will bring relief.

He has a warning. "Fund managers are always hugely optimistic about what's going to happen, about mobile phones being able to do more and more things. But earnings are everything. When the cycle in past its peak, do you want to take a gamble? I say, don't be a hero."

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