Over the past two years, investors in the technology sector have had a volatile ride. After rising 8...
Over the past two years, investors in the technology sector have had a volatile ride. After rising 85.6% in 1999, the best-ever annual rise for Nasdaq, last year was its worst ever, with the Composite index falling by 39.3%.
Despite strong earnings expectations for the first quarter of last year, pressure from rising interest rates eventually took their toll on valuations. As the excesses began to unwind, margin calls turned many private investors into forced sellers. As markets struggled to justify excessive valuations, one sector after another came under pressure. In the latter half of 2000, the sentiment surrounding technology was further depressed by the failure of the traditional year-end rally to materialise.
Several factors prevented this from occurring. The rapid US economic slowdown, so far the sharpest since 1990, has made investors wary about corporate budgets, especially in telecom spending. On top of this, consumer demand for PCs has been surprisingly weak.
The impact of stock exchange regulation in the US has also been important. Regulation FD, introduced in October, has meant that companies have been much more guarded about what they can say to analysts and investors. In addition, because of a difficult economic background and the earlier confusion in the US presidential election, analysts have been reluctant to look as far forward as they would traditionally do at this time of year.
Moving forward, the key focus for 2001 remains on software used to implement corporations' Internet strategy. It is important to distinguish between the entire 'webification' of the corporation and the highly visible and correctly criticised dotcoms.
The rationale for technology spending on the corporate side remains robust. Analysts meetings with GE Capital, one of the largest IT spenders worldwide, show they are less than 30% along the path to building their new IT infrastructure and applications. GE Capital require capital projects to have a payback of less than 18 months, a far cry from the more traditional capital spending projects that are so vulnerable to economic slowdown.
To date, software spending has been targeted at solving specific problems with Customer Relationship Management (CRM) software focused on the sales cycle and client management, for example. Leadership in this field has allowed Siebel Systems to grow its revenues historically at around 100%pa. As we move forward, companies will need to integrate CRM software with the whole production process using Enterprise Application Integration software.
Finally, investor psychology is at last turning more negative. We had been concerned, despite the weakness in the market, that investors remained too complacent. Now we are seeing individual investors selling, with most reported to be in the bearish camp. This type of capitulation may not be pleasant but it is indicative of a turning point.
Alan Torry is technology fund manager at SGAM
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