The long-term track record of technology has been impressive. Over the past 10 years, the Nasdaq has...
The long-term track record of technology has been impressive. Over the past 10 years, the Nasdaq has grown by 800%. More recently, things have been less impressive. But before looking at why technology has recently disappointed, it is important to look into the sector itself.
Geographically, the majority of new technology firms are based in the US. The relentless adoption of new technology products by US business has played a key role in driving the unprecedented expansion of the 1990s. US firms are now devoting more than 55% of their capital spending to technology. Innovations have enabled companies to boost productivity, reduce labour costs and increase profitability without exerting upward pressure on prices.
The notable exception is telecoms, which is dominated by European firms. Nevertheless, Europe is regarded as lagging behind the US in most technological areas. However, the globalisation of industries is intensifying competition, and the rapid adoption of the internet will accelerate this process further.
For Europe, it is a case of investing in IT or fading away. European industries are only just starting to catch up and regain their competitive position. It has already made significant advances into key areas of technology, though. The near digitalisation of mobile networks in Europe, early roll-out of digital TV, and penetration of satellite broadcasters offer Europe a chance to lead the US in the broadband and mobile internet market.
The impact of technology has been huge reflected by the long-term investment track records of technology funds. But the past 18 months (to April 2001) have been volatile for technology investors.
There are two reasons behind this volatility. The US enjoyed a massive boom in spending both from companies and the consumer because of the cuts in rates that took place in late 1998 and early 1999. This boom led to the (Fed) increasing interest rates again in the summer of 1999.
Markets tend to anticipate economic growth by about 12 months, so the fall in the market that began in the spring of 2000 was effectively signalling a sharp slowdown in economic growth in the spring of 2001. Also, there was huge interest in the sector from institutions and private investors. However, shorter-term investors such as hedge funds and day traders jumped onto this bandwagon causing valuations to become over extended.
Technology spending remains an essential expenditure in a tougher environment as companies strive to improve efficiency and reduce costs. The sector is as cheap as it has been for a long time and valuations of many leading technology firms are attractive. But it will remain volatile and it is not for investors looking to double their money in five minutes. For the long-term investor, though, there is no other sector of the global economy that offers a better opportunity for sustained growth.
John Pullar-Streckar is head of technology at Aberdeen Asset Management
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