Technology shares are down, but are they out?; Dollar weakness

Dollar weakness

One of the cautionary tales used to warn off investors during the great technology speculation of the past three years - so often in fact that it became a bit of a cliché - is that during the Klondike goldrush at the end of the last century, it was those selling picks and shovels in the frontier towns that ended up making the most money, not those out prospecting for gold in the hills and rivers of the Yukon.

One of the cautionary tales used to warn off investors during the great technology speculation of the past three years - so often in fact that it became a bit of a cliché - is that during the Klondike goldrush at the end of the last century, it was those selling picks and shovels in the frontier towns that ended up making the most money, not those out prospecting for gold in the hills and rivers of the Yukon.

Whether this was actually true scarcely seemed to matter. The point was well made none the less. It would be hard to generate serious new wealth from selling across the new distribution channel of the internet, but it might be possible to make it out of building and possibly even operating the new backbone infrastructure.

By about this time last year, the principle was already well established in investment circles. In the US, where things tend to happen first, the business-to-consumer sites were beginning to bomb on stock markets and it was becoming progressively more difficult to float them. However, anything to do with building and operating the high speed networks the internet uses as its life source, including e-enabling technology for business use and other applications, was still in hot demand.

Unfortunately, even this last gasp for the technology bubble proved to be founded on faulty logic. It doesn't take much in the way of imagination to realise that if there are no chancers out there in the hills prospecting for gold, then there isn't going to be much of a market for picks and shovels either. By March this year, which marked the high point of the technology bubble, reality was beginning to dawn. The telcos, the technology suppliers and the e-enablers began following the dot.coms into a tailspin. Yet the hope that there may be gold in the picks and shovels persists to some degree. What's more, there is an element of truth in it.

At a recent meeting with suppliers, Sir Peter Bonfield, chief executive of British Telecom, told his audience that despite BT's debt crunch, he would not be cutting back to any significant degree on capital spending, which would remain high to fund the build out of third-generation mobile phone and high-speed fixed-line networks. The bad news was that he would expect suppliers to share in the pain of such sustained spending.

The point is that despite the leaner times we are heading into, most companies are going to have to continue spending heavily on IT just to stay in the game. The analogy that is often made is with a retail bank that is forced to install an ATM network not because it will enhance profitability, but because everyone else is. The same phenomenon ought to help sustain technology spend a good deal longer than the scaremongers who warn of recession - and worse - might suggest.

Of course, the wilder excesses of the technology bubble are over. For a while there, Charles Schwab, the online broker, had a larger market value than Merrill Lynch and Yahoo! was bigger than companies like Walt Disney. Those days will never return. But like some great supertanker at full throttle, the momentum of the New Economy is now so well established that it will take more than a bear market to blow it off course.

What is not so well assured is its profitability. Growth in certain parts of the New Economy remains high, but it is none the less slower than it was, pushing profitability for many technology companies further into the future. And as this column has repeatedly stressed over the past three years, the New Economy is not in any case good for profitability. E-commerce gives potential for huge savings and efficiencies in all manner of businesses. But the competitiveness of the business environment means those savings must be passed on to customers, or the company will lose out to rivals.

What makes things even worse for technology stocks is just how few technology franchises prove durable. Undoubtedly, there are still winning growth companies out there. The technology sell-off hasn't changed that. But finding them is proving harder than ever.

Dollar weakness

The danger of slower growth, or even (whisper it) recession, in the US has altered prospects in the currency markets as thoroughly as a blanket of snow can transform the landscape. All through the dog days of euro weakness last summer, analysts said it would take bad news out of America to revive the ailing single currency. In the Christmas holiday season we have seen both the bad news from America and a fledgling euro revival. The question is whether this really marks a turning point in the fortunes of the two currencies.

As Lawrence Summers, US Treasury Secretary until the inauguration of President Bush next month, pointed out yesterday, the slowdown in American growth has to be viewed in perspective. An expansion of 3.5 per cent, a typical forecast for 2001, is only disappointing in comparison with recent figures of 5-6 per cent. It would still be faster than the likely growth in eurozone GDP.

By contrast, even the optimists about Europe are predicting growth of no more than 2.5-3 per cent, and some are starting to warn that this is a bit rosy. Certainly the picture across the Continent is mixed. France is doing well but the German powerhouse might be slowing. The mainstream OECD forecast sees eurozone growth slowing in 2001.

Despite the revival in the euro, then, it is hard to avoid the conclusion that investors have no real appetite for the currency. There is no exciting European growth story to tell. The currency's exchange rate against the dollar is still dependent on shifting sentiment about American prospects. If pessimists like the strategists at HSBC, predicting a technical recession with two quarters of negative growth in the US in 2001, are correct, we will soon be talking about the euro climbing back above parity. If not, the single currency's recovery will peter out.

Against the backcloth of this drama, other currency moves are sideshows. The yen has weakened sharply, as the spring and summer flurry of optimism about Japanese growth dissipated. Its new lows reflect official comments suggesting the Japanese authorities are relying on a weak exchange rate to keep the economy growing at all next year.

Meanwhile, the pound is gaining against the dollar and yen, but weakening against the euro. This is a welcome shift as more than half of UK exports go to the EU. The only concern would arise if the sterling index fell enough to alarm the Monetary Policy Committee about imported inflationary pressure. For now, the markets believe UK interest rates are more likely to fall than rise. But the outlook for the pound, too, will depend on how events unfold across the Atlantic.