Internet-related stocks have shot ahead in the past three months, as they have in developed markets,...
Internet-related stocks have shot ahead in the past three months, as they have in developed markets, leaving a growing sense they may well be overvalued.
Peter Bassett, emerging markets fund manager at Henderson Investors, anticipates a shake out of internet-related stocks during the first quarter of 2000.
He says: "I expect there will be quite a lot of disappointment early next year, particularly among stocks where earnings are speculative rather than real."
Ashok Shah, fund manager at Old Mutual, says internet related stocks are popular now but have run too far.
He adds: "Many of them aren't earning. These companies are worth holding on to, to see what activity starts happening next year, for instance the increase in the number of subscribers. It is not necessarily time to sell but it is not time to start buying into many of these companies either."
Bassett says the main reason for the shakeout will be due to a lack of liquidity. He expects the Fed and other monetary authorities to tighten liquidity. By contrast, in the lead up to the millennium and in anticipation of millennium bug problems, there is currently ample liquidity in the market.
Shah says the technology and telecoms sector should grow in line with internet usage but the anticipated surge is already priced into the market.
He believes within that sector, domestic internet-related telecoms should perform particularly well with revenues growing in line with the growth in the internet.
He says: "Hardware companies, given that they have performed very well will struggle to maintain that performance. These companies will grow but the growth will not be spectacular. The performance of software companies going forward is expected to be lacklustre in comparison to performance over the past year but will still be very good."
Bassett cites an example of an overvalued company as Satyam Infoway, an internet service provider in India, listed on Nasdaq. Its current market capitalisation is $28,000 per subscriber.
He says: "The Indian internet market is clearly exciting but still very much in its infancy with only one Indian person per hundred having a personal computer, the market capitalisation of Satyam Infoway at the equivalent of $28,000 per subscriber looks over stretched, particularly given that the subscribers are possibly only paying a few hundred rupees every month for the service."
Despite Bassett considering the internet-related sector to be overvalued, Henderson emerging market funds are still overweight in technology. Bassett focuses on what he perceives as the solid end of the market, which he describes as "established businesses with real earnings."
He says: "One such company is Telmex, which started the year at $50 per share but has since risen to $110. This company is now trading on 20 times historic earnings and earlier in the year was trading at 15 times. The optimism follows the announcement of a joint venture with Microsoft to open a Latin American internet portal.
"I also like VSNL in India, an overseas telephone provider which is a value play. This company is quite cheap, trading of 14 times prospective earnings. Meanwhile the stock price has doubled since the start of the year and is now trading at $28. Another is SK Telecom in Korea, where we are playing recovery in Asia and expect strong growth."
Among holdings in the Old Mutual funds is Check Point in Israel, which builds firewalls for internet subscribers. Shah likes this stock, saying it provides a product which the market desperately needs. The price on this stock has come a long way, rising by more than five times since the start of the year.
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