An increase in profit warnings from technology companies has deepened the unease of the US markets...
An increase in profit warnings from technology companies has deepened the unease of the US markets. In March, the Nasdaq Index fell well below 2000 in the wake of bad earnings reports from mobile phone giant Motorola and computer maker Sun Microsystems.
Fund analyst at Fidelity, Adam Smears, says the large number of profit warnings from tech-type companies over the past year has added to US market volatility. "In particular, PC manufacturers and chipmakers were missing their targets or guiding estimates lower," he says. "The cause of the warnings was weak demand, which in turn came from the interest rate increases implemented over 1999. Some also speculated that the heavy IT spending conducted for the year 2000 problem had mopped up a lot of demand."
Many analysts agree the telecoms, media and technology sector is continuing to deteriorate and the hi-tech bubble has burst. Although technology stocks are significantly cheaper than they were, most are still massively overvalued, according to some analysts. The US Federal Reserve lowered borrowing costs twice in January in the hope of reviving the economy, but in the short term and it is hoped that last week's cuts will do the same, Smears says.
Director of North American equities at Royal & SunAlliance Investments, Andrew Hudson, says: "The tech sector is not getting any better and we are always hearing more bad news from technology companies, notably Sun Microsystems and BAE Systems."
But while Ian Link, a technology portfolio manager at Franklin Templeton, says he is clearly aware that sales in technology companies are slowing, he is more optimistic about the future. "We can see that IT managers are deferring everything they can until they have a better view of the market," he says. "I believe technology will bounce back but prices will not be as high as they were in early 2000."
Link regards the slowdown as a normal cycle, and says the trend towards an increased proportion of the economy going towards technology will continue.
"The technology revolution has another 20 years ahead of it and the potential of the internet is not close to being realised," he says. "Wireless is only in its early stages of development and technology will be a dominant force in the economy over the next 15 years."
Hudson agrees that a rosy technological future lies ahead. "In the next five years, we will have new cycles and we will be amazed at what we are doing," he says. "Although there are other handheld devices to embrace, third generation mobile phone licences will be delayed in the next year and we will see a late, rather than an early, arrival of that technology."
Both Link and Hudson expect the next six months to be tough across the Atlantic. "Storage stocks are down, while media stocks are looking reasonable, more visibility in this area is still needed," says Hudson. He adds that telecoms are receiving more support.
Looking back at historical performance, Link says markets begin to recover before an initial recovery in the economy and sees no reason to believe why this should not happen again.
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