Has the new economy gone up in smoke? Significant changes have been occurring to developed world eco...
Has the new economy gone up in smoke? Significant changes have been occurring to developed world economies. The driving force remains technology. This is nowhere more obvious than in the US.
What has not changed is some of the more common economic laws, cycles have not disappeared and recessions will still exist. Although the US economy is not likely to see two quarters of falling GDP, the last six months has seen a number of excesses disappear out of the system. The corporate bond and equity markets have stopped financing the excessive expansion of long distance telecommunications. There is no industry measure of capacity utilisation, but the accelerating decline in prices points to short-term over-supply of long-distance minutes.
The bubble of technology spending on Year 2000 issues and the dot.com mania has gone and demand is now beginning to normalise. As a consequence, over ordering of components has started to unwind as chipmakers, in particular, are working down inventories. The gloom and doom is symptomatic of this correction, which is itself the consequence of stock market excesses. Analyst growth rate forecasts started to rise to justify higher stock prices to the point at which bubble spending was projected forward for five or even ten years. We are now getting to the point where forecasts are beginning to extrapolate the recent decline in growth rates forward.
This is a good sign because it is also excessive. When the dust settles, profit growth for the technology sector over the next five years will be 1.5 to 2 times normal corporate earnings growth and many of the growth companies in the sector are beginning to look cheap.
Investors have to be more cautious here. Future winners will not necessarily be those of the last five years. Much of the spending in recent years has been on hardware and infrastructure. What is needed is investment to be made in tying it together efficiently.
This involves spending on enabling technologies. In the telecom industry, this would include provisioning the optical long-distance network to work with increased capability in the office and the home. This would include Metro (intra-city) loops and the use of optical to optical switching. In the internet and the corporate areas the need will be for hardware, but particularly software and services that integrate systems so they can operate together seamlessly.
The collapse of classic technology stocks has hidden the rise of medical technology. The outlook for the biotechnology and medical devices industries is becoming more positive of late. Demographic changes as the global population ages have led to a rising need for new and better detection and treatment of poorly served disease categories.
Companies focusing on areas including cancer, autoimmune disorders and heart disease are producing novel technologies in the therapeutic and screening areas.
Examples include Immunex (IMNX), which is using a natural protein to mop up one of the principal factors involved in rheumatoid arthritis and Medtronic (MDT), which is using stent technology to unblock diseased arteries.
Discoveries in genetics and cellular and molecular biology have led to innovative ways of tackling what are often untreatable conditions. Amgen (AMGN) is one company that has used its experience in haematology to produce a protein product that replaces red blood cells lost as a consequence of renal failure.
The recent publication of the Human Genome has raised the tantalising prospect of screening for disease at a DNA level and allowing much more individualised treatment. However, the much smaller number of individual genes found has suggested that gene interaction is much more complex than first thought. It is likely that this unexpected complexity will mean future medical breakthroughs will come not from the genetic information itself, but from understanding these gene interactions and how they affect the product of gene expression, proteins.
Proteomics, the comprehensive study of protein structure and interactions, is therefore likely to be an increasingly important area in the future.
As in all areas of technology, good ideas are not a substitute for a good business model. The lessons of the past, where small biotechnology companies overextended themselves, have in most instances been learned. Biotechnology companies are now much more likely to partner their lead compounds to reduce the risk to their commercial life if, or perhaps that should be when, failures occur. There still remains an excitement in technology investing that will not go away. This is an area with very highly volatile stock prices but it has always proved to be a big long-term winner for the patient investor.
Jim McCabe is lead fund manager, Gerrard Global Technology Fund
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