If a day is a long time in politics, last year must have felt like a lifetime for investors in the t...
If a day is a long time in politics, last year must have felt like a lifetime for investors in the technology sector. Although most indices struggled to perform, the Nasdaq Composite and Goldman Sachs Internet Index experienced their worst year ever, falling in US dollars by 39% and 74% respectively.
While there is little doubt we experienced a technology and Internet 'bubble', it is equally apparent the fundamentals have remained strong. The Internet continues to experience rapid growth and the vast majority of technology spending continues to be linked to this.
Crucially, however, while the fundamentals are not radically different from this time last year, the beneficiaries have changed significantly. Twelve months ago it seemed any collection of individuals with enthusiasm and an idea could raise finance and unleash a 'non-profit generating' business model on the marketplace. This put in question the margins of traditional companies and the market share and profitability of the existing virtual companies.
The implications of the change in attitude towards financing 'concept' stocks cannot be overstated. Firstly, there will be fewer Internet companies as IPOs are cancelled and dot.coms with unsustainable business models go bankrupt.
Secondly, the pricing models of all but the most financially robust Internet companies will become more benign as strong cash-flow and low burn rate become pre-requisites for further capital market support.
The net effect of this is that traditional companies with proactive Internet strategies and the leading blue chip virtual companies will control a larger proportion of the Internet pie. Our global e-commerce fund, the Sarasin [email protected] (GB), was specifically designed to benefit from these trends.
As we look forward to 2001, fund managers are faced with a number of important questions such as: How sharp will the economic slowdown be and what impact will this have on corporate earnings? But, the issues these questions raise are more than offset by the positive impact of falling interest rates, exceptional long-term fundamentals and superior earnings growth.
The dramatic fall in equity markets during 2000 has created a rare opportunity to invest in what we believe will be the leaders of the new millennium, at prices significantly below their recent highs.
Rarely do investors have an opportunity to buy the leading Internet companies offering good management, solid balance sheets, strong brand names and proven business models, at 80% or so below recent highs.
Investors also rarely have an opportunity to buy traditional companies, which boast the most proactive and innovative Internet strategies, on valuations comparable to, or even less than, their less Internet-savvy peers.
Paul Cooper is fund manager of the technology group at Sarasin
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