The rise in tech stocks has been impressive over the past year but cracks are beginning to appear in...
The rise in tech stocks has been impressive over the past year but cracks are beginning to appear in the near seamless outperformance posted by the sector.
Many of the high returns available from the market have come from small cap stocks pushed up not only by foreign fund managers but also by domestic investors. This latter category has in some cases been borrowing money to invest in such stocks.
Natasha Chetwynd, fund manager at Britannic Asset Management, says: "Small technology stocks have risen over the past year. Individual investors have bought these stocks very heavily on margin. Margin is where you deposit with your broker perhaps one third of the value while the remaining two thirds has to be paid only after a three- to six-month period.
"If the stocks go down a certain percentage the brokers asks the investor to put more money up or sell. Last week there were sharp falls in stocks, some of this has been triggered by margins."
A further possible negative for the small cap investor is the issue of liquidity. Chetwynd warns that it is more difficult for investors to sell out when they want to than is the case with large caps. Even so the smaller companies have proved to be so popular with investors that many are now more expensively valued than their large cap brethren.
On this basis the investor might well think that large cap stocks would be the better tech investment. Chetwynd says that it is as important to stock pick here as elsewhere, especially as many lack a focused approach to core business lines.
She adds: "Large companies are having problems as there is not enough cost control. A lot of them are very diversified so some divisions are doing very well and other products are not doing so well. For example a company dependent on videos might be under pressure as DVDs become more widely popular and accepted."
The distinction between large and small caps is one that Japanese investors themselves are not too concerned about, according to Andrew Nagele, fund manager at Legal & General.
He says: "Investors are buying technology stocks as growth is a given. They look at shares which are in issue or on the market rather than at market cap although a lot have moved away from this and are now looking at market cap."
As in the West the boom in new technologies such as the internet and mobile phones has created a bull market.
Nagele says "The Japanese are momentum investors, they go with the flow and at the moment it is with smaller companies. The stock market has never been about giving income, it is about capital gains. If things are going up they make better capital gains. It is a trading instinct.
"Smaller companies such as Softbank and Hikari are now in the top 20 and both these are on the OTC exchange. Investors have been attracted to these business opportunities."
There is a new stock market coming to investors this June, the Nasdaq, which is specifically focused on new economy stocks. It joins the so-called Mothers Market which launched in December 1999.
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