Above trend growth exhibited by European technology stocks is threatened by slowdown in the US, acco...
Above trend growth exhibited by European technology stocks is threatened by slowdown in the US, according to Michael Nicol, investment manager at Scottish Value Management.
The Bloomberg Europe 500 index shows telecoms, telecom equipment and media as among the bottom performing sectors for the year to 7 March. Since 29 December the BE500 telecom equipment index has fallen 32.77% in euro terms compared to the overall index's returns of -6.27%.
Nicol says: "The US slowdown has impacted on Europe. But Europe does not trade a great deal with the US, so we expect Europe to slow down by 2.5%."
Nicol believes technology stocks will continue to be affected as they have a great deal of exposure to the US market. He adds: "The information technology industry was above trend growth and is now under a cloud. In the hardware semiconductor sectors, people ordered more than anticipated and so they do not need to buy as much as before." Nicol believes valuations in the technology sector are optimistic. But James Elliot, senior portfolio manager at Chase Fleming, says there is still an opportunity to make money in technology because of the relatively low rate of spending in the sector. The total market capitalisation of technology stocks is still roughly half the level of the US, so he believes there is still room for growth. He expects much of this expansion to be from small and medium-sized technology firms.
Elliot believes that over the past five years Europe has had considerably less production and slower growth compared with the US. In Europe, technology spend on average has been 2.3% compared with the US's 5.6%. Computer penetration in Europe is one in every four homes compared with one in every two homes in the US. Elliot believes there is more room for improvement in the European economy and growth in technology.
But both Elliot and Nicol are steering clear of the telecoms sector. A year ago, prospects for mobiles were inflated and services that were expected to be offered have not been introduced. Furthermore, third generation licences turned out to be far more expensive than first thought.
Companies which paid a lot for licences are now heavily in debt. France Telecom has floated Orange to try to repay debt and BT and Deutsche Telekom are also trying to raise cash.
Nicol favours financials as they have been good in the market, growth is reasonable, they are not overvalued and are low risk. He also likes support services such as catering and food firms.
Marco Ricci, fund manager at Deutsche Asset Management, says that looking through short-term uncertainty, the longer-term future for European small-caps is fairly positive. Deutsche believes Europe is one of the better-positioned markets going into 2001.
Ricci says: "We had previously expected a fourth quarter 2000 rally but markets suffered from issues ranging from higher than normal profit warnings to political tension in the US and Middle East. Many investors are playing a game of wait and see, reluctant to take the plunge until the water clears and the depth of the US recession is easier to see. We are slightly more positive and believe bad news is already priced into the market and strong fundamentals underpin the US economy."
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