Outlook: Equity bubbles

ALAN GREENSPAN was at it again yesterday, albeit in more subdued form than last time. There were no references from the Federal Reserve chairman to "irrational exuberance", but there can be no mistaking the meaning of the following incantation, delivered in characteristically convoluted form: "The level of equity prices would appear to envision substantially greater growth of profits than has been experienced of late".

Is he right? Yes and no seems to the the answer. It tends to be forgotten in citing the continued resilience of stock markets to the world's growing economic travails that for most companies the bear market is already more than six months old with little sign of abating.

What is keeping the stock market buoyant, both in the US and in Britain, is a relatively small number of global mega stocks which, because they keep merging with one another, just carry on getting bigger, progressively vacuuming up more and more of the world's supply of investment funds as they do so.

And even among the big companies, growth is confined to a quite small number of sectors. Generally speaking, the companies which are outperforming are in hi-tech, sunrise industries. Many of them don't yet make profits, but to distort Mr Greenspan's meaning, their stock prices envision greater profits growth than is presently experienced.

So there are two forces at work here. One is the "big is beautiful and even better if it is global" syndrome. The other is that of investing in our future, the new industries which might one day take over from the old. This type of investment has little to do with economic fundamentals or current corporate reality - it is all about hope. Some of this hope may be reasonably well founded. But a lot of it isn't.

This week, British investors have been eagerly snapping up shares in any company which even hints that it might at some point make money from the boom in Internet traffic and electronic commerce. Shares in Zergo, a tiny company with a niche in Internet security software, have soared on the back of a series of strategic alliances with the likes of Intel and KPMG.

Even though these deals - which are little more than public declarations of friendship - have no direct impact on Zergoc's tiny revenues, they have been enough to lift the company's market capitalisation over pounds 200m.

Strangely, the market's treatment of Zergo looks sane compared to some of the other stocks that are enjoying an Internet-related boost. Excitable analysts were yesterday trying to talk up Great Universal Stores, probably one of the most conservative retailers in the country, as an e-business of the next century. Not that Lord Wolfson is showing any sign of getting online. It's just that, if he did, brokers reckon GUS could do quite well.

The argument is clearly illogical. Just like Dixons, GUS is not going to be a major beneficiary of the electronic revolution. For both these companies, online retailing is much more likely to be a way of protecting existing revenue streams from potential rivals, rather than creating new value. But then those share prices have to be kept moving ahead somehow, haven't they?