Although the sector is a long way from a complete recovery, certain technology, media and telecoms companies are showing promise ' although stock selection remains all important
For those technology investors that piled into the market at the start of 2000, watching the progress of their savings ever since has been akin to a high level freefall. Technology fund managers have naturally been scrambling for any kind of emergency chute ever since.
Even though technology, media and telecom stocks enjoyed something of a surge in growth in the last months of 2001, the sector as a whole was still close to 40% down over the year.
With that in mind, it is far too early to be pointing to a significant recovery in the sector. The recent progress has really resulted from the confluence of greater liquidity in the market and from investors rotating out of defensive consumer stocks. There simply has not been enough good news to justify the extent of recent results so it looks as if some of the big names in the sector will be heading downwards again before too long.
But before investors can take any educated view as to what the future might hold, they need to understand what led up to the bursting of the bubble at the start of 2000. The tech sector did not actually fall all in one go but rather crumbled in three successive stages.
The first to go was the internet sector. At the time, there was a whole eruption of new companies with new ideas. The stock market was happy to be led into believing many of the great money making ideas that were floated but very few actually generated any revenue and so mass bankruptcies were inevitable from there.
The second stage was the downfall of telecoms. Speculation as to increased internet traffic over the networks sent telecom companies racing for first mover advantage. Existing providers like BT were set up with voice networks but were just not ready for what seemed to be a step change. In the meantime, companies started springing up from nowhere hoping to build state-of-the-art networks on minimal timescales. These ideas were then sold to the stock market and prices soared. Of course, when the demand for new services failed to materialise, it was only a matter of time before prices collapsed and the companies went bust.
The final stage of the collapse involved the mobile providers. The mobile sector had been growing massively and was a particularly strong area of the European technology sector. But the industry had been investing heavily in mobile networks as their revenues grew.
Meanwhile, the strength of GSM customer growth and share prices gave companies a false sense of security and encouraged them to bid for 3G licenses at unrealistic prices. It was only after the breathless excitement of the 3G auctions that telecom companies first began to question the prices they had paid and, indeed, whether 3G would actually work.
In addition to this, mobile companies were investing heavily in subscriber growth at a time when the market had reached saturation point. Germany, for example, had doubled its mobile use from 35% to 70% of the population but valuations still implied further growth. Of course, no product can ever reach 100% of a market ' this is one of those things that is blindingly obvious in hindsight.
The worsening economic environment was what finally broke the back of the sector. Projections of continued technology spend suddenly evaporated as corporations started to batten down the hatches.
These structural weaknesses within the sector meant that some companies had a long way to fall when the bubble finally burst and led to the rise of the now infamous 95% club ' literally a roll-call of stocks that are now worth only 5% (or less) of their former value.
Baltimore Technologies was a prime example: the stock market saw massive potential profits from the company before finding out the market demand, which led to extremely high share prices. What was a good idea in theory has never actually become reality.
A similarly high-profile disaster was Marconi. Originally GEC, a very safe, established conglomerate with interests in train making and power generation among others, it suffered from a policy change that put the focus purely on telecoms. Seduced by the growth potential, it sold off all its defensive businesses, borrowed money, and made expensive investments into telecoms equipment.
We avoided the worst days for Marconi because all we could see was the company losing the security of its diversity and significantly raising the risk attached to its ongoing business.
A crucial part of the equity puzzle is to understand what expectations are factored into a company's share price. Part of the problem with the last boom in equities was that too many investors were willing to accept virtually any valuation method if it helped to justify their trades. If you look at the example of the dot.coms, confidence in their prices was based purely on rumour and the fervent hope that these companies could somehow repay investor faith. Investors appeared to overlook the fact that the dot.coms made no money, paid no dividends and had little chance of ever justifying their valuations, whatever multiples were being offered by their supporters.
Attitudes have changed a lot since then however, and companies are unlikely to be market funded to the extent they were during the tech boom. In fact, markets are more or less closed both to new companies and to the refinancing of old ones.
Old fashioned concepts like corporate earnings and profits have superseded more speculative approaches making the E in P/E important and putting the emphasis back on stockpicking. That is just as well, as those technology, media and telecom stocks that look most likely to make the running are littered across a range of different sectors.
At the moment, the promise of clean energy has put alternative energy producers like Vestas in the limelight, for example. Elsewhere, some of the mobile phone and mobile network operators are experiencing something of a revival. The likes of Vodafone have stopped subsidising improbable new customers, while revenues have not only stabilised but also resumed growth. This revival is obviously also good news for handset and makers like Nokia, and their component suppliers such as Epcos and ST Microelectronics.
The essence of successful stock picking though is not just recognising such emerging themes but understanding how they impact on individual companies. The recent experiences of Nokia and Ericsson are a good example of how this works in practice.
Nokia's performance has remained strong in comparison to the rest of the industry. It continues to grow its market share in handsets while maintaining profitability at much higher levels than its competitors. Contrast this with Ericsson, where even though the company looks to be making progress in addressing its problems, the market has all but turned its back. Since only the start of 1999 Nokia has risen by 78% while Ericsson is down 3%.
The message then for private investors in terms of technology investment must be to focus on the individual stories within the sector. There is no question that there will be some major romances between investors and technology stocks in the years to come ' the skill will be in avoiding the heartbreakers.
The tech sector collapsed in three stages: internet, telecoms and mobile providers.
No product can ever reach 100% of the market.
Confidence in the dot.coms' prices was based purely on rumour and the hope these companies could somehow repay investor faith.
Irish border, resignations, market volatility and more
Revealed – successes across all 11 categories
Fidelity International multi-asset CIO James Bateman talks to Julian Marr about recent market volatility, portfolio positioning and his thoughts on the coming year
Follows Phil Young
‘Positive so far’