The debate about when the next big stock market crash will occur continues. Officials - Bank of Engl...
The debate about when the next big stock market crash will occur continues. Officials - Bank of England governor Eddie George is just the latest - keep warning that the current climate and pace of economic growth cannot go on. The longer nothing happens the shorter the odds become that something is about to. But investors hear what they want to hear. They seem more inclined to believe instead that this time everything is different.
What exactly is "the market"? If it is represented in the UK by the FTSE 100, around 15% of that index now consists of a single stock - Vodafone. Half a dozen others account for another 40%, and most of them are the "tellytechs" of telecoms, media and technology, or TMT. If you are tracking the FTSE 100 are you still a UK general equity fund or a telecom/tech fund with a pretty strong international bias?
The skewed indices are reflected in performance records. One fund manager this week told Barrons, the US financial paper: "If you are not in TMT, you're dead meat." If you hit the right stocks in the right sector, you're a gloryboy. Janesh Manek's Growth Fund was up 89.4% in calendar 1999, against 19.9% for the average UK All Companies unit trust. Of the top 10 holdings accounting for 36.8% of the fund, eight were tellytechs. Bingo.
Rejected sectors of the market can only wonder or wail, and wait. The fact is, that for most other non-TMT sectors, the crash has already happened. There are probably 40 stocks in the FTSE 100 at five or seven year lows. Among UK sectors, chemicals, paper, airlines, auto, retailing, food and beverage, energy and banks are all down significantly this year.
Of course there may be very sound reasons, which have nothing to do with fashion, why a non-TMT stock keeps sliding. That factor is, and always was, part of the market rough and tumble. Some stocks (such as utilities) are feeling the heat of regulatory interest, which makes investors nervous: fair enough. Others are struggling to cope with their changing corporate environment.
But many CEOs are fuming at what they consider the humiliating valuations of their companies by greedy, short- termist investors who require every stock to be rocket propelled. Performance which historically is perfectly adequate or even good, is considered merely mundane. Lloyds Bank produced a decent set of results recently, only for the share price to be marked down 9% because operations didn't exhibit internet-style growth.
Some valuations defy logic: The current market value of British Energy is £1.8bn, just double what it cost them to build the last of the dozens of power stations they own.
Companies are also beginning to point fingers at the subjective perceptions of the analysts who calculate valuations. If Followme.com spends £50mn on advertising, it is seen as a shrewd strategic investment by a "new economy" company; while the same spent by utility Stillwaters plc is considered an unjustifiable cost by a dinosaur of the "old economy".
The market is doing what might be an impossible two way stretch. On one side the tellytechs are valued at impossibly high levels, and on the other, spurned stocks are valued at improbably low levels. Something has to give, and it will. A "market" crash will mean that the tellytechs could take other sectors down with them, or bounce them back into favour.
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