Technology and internet stocks in the US have been on the up and up. The Nasdaq index led the way in...
Technology and internet stocks in the US have been on the up and up. The Nasdaq index led the way in the final quarter of 1999, hitting several new highs, and the impact of this has fed through into global markets generally. Our only concern now is, that whilst some of the gains have been entirely appropriate given the strong growth in the sector, there are a number of stocks which have simply become caught up in the frenzy and are now clearly overvalued.
How long this situation of demand driving prices without thought for quality will go on is not entirely clear but at some point in the near future, we are likely to see a clear out of sorts. Investors will become more discerning about which stocks they invest in, rather than chasing any new issue for short-term gain and it is a possibility that, in the near term, this could affect the sector more generally. However, such a move would be very healthy and should therefore not be a concern for those investing in internet-related stocks for the longer term.
Basically, despite these current highs, there is still some way to go for this sector.
For the winners of the future, those companies which thrive in the new environment, through the rationalisation and consolidation which is likely to occur, there is a lot of growth to come.
Internet penetration levels in the US, considered to be the leading country in this area, are no where near saturation and there is therefore still some growth in internet use to come.
Currently, around 40% of US households have access to the internet, 70% of whom are buy-ing products online. The amount of money they spend buying online is also still currently quite low.
However, in the year 2000, internet access will be boosted considerably as a multitude of different devices are launched, making internet access easier and cheaper, webTV, for exam-ple and, perhaps more notable in other countries around the world, mobile phones. This takes us one step closer to the internet becoming a mass market product.
So we will see the number of people with access increase, the proportion of users buying online increase and the amount spent by any individual household will also increase.
Potentially, a lot of increase but the business to consumer sector is not where we see the real gains of the future.
This area is likely to become very competitive and it is currently still a little unclear which companies will be the outright winners. In our opinion, the real internet winners in the future will be those companies operating in the potentially vast business to business sector: those companies who have a strong brand name and a clear cut, positive internet strategy.
The internet sector will become increasingly competitive and there will be a cannibalisation of business plans, with companies needing to invest money in the back end to support the consumer.
We are also about to experience a period where traditional companies become more successful in migrating their business onto the internet to enhance their existing distribution.
Our strategy of having a higher weighting in pure internet companies has paid off in recent weeks with the climb of the Nasdaq.
However, we are now likely to move to more internet related stocks, i.e. a mixture of those companies who support and build the infrastructure for the internet and those perhaps more traditional companies who are embracing the net and using the new distribution channel to rationalise, consolidate and even enhance their existing business.
This move should be particularly relevant as the internet really begins to impact across all business sectors and industries over the coming months.
Chris Bell is a fund manager at Framlington
Joined as head of strategy, multi asset, in June
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