US smaller companies are likely to lag blue chip technology stocks in an expected Nasdaq rally in th...
US smaller companies are likely to lag blue chip technology stocks in an expected Nasdaq rally in the fourth quarter 2000.
Fund managers remain largely optimistic about the Nasdaq's near term outlook, despite recent volatility in the market, with many anticipating strong growth.
The Nasdaq posted strong returns from the last quarter of 1999 until April 2000, when investor confidence crumbled. Despite a stuttering performance in the third quarter, with a 439.36 point rise in August being just as quickly corrected in September, investor confidence is slowly being restored.
Geoff Paton, head of North American equities at Abbey National, says: "The Nasdaq is set to do very well over the next two or three months." He blamed second and third quarter undulations on perceived weakness in the PC area and the expectation demand for PC's would be low.
Mick Brewis, US fund manager for Baillie Gifford, agrees, noting there continues to be worries concerning the level of PC sales. He attributes this to sluggishness in European corporate PC sales, coupled with a slowdown in sales of PC's to the US consumer market.
However, optimism for the Nasdaq to perform well over the third and fourth quarters centres on the continued success and strong earnings growth of internet and e-commerce enablers.
Nick Lee, US fund manager for Ashburton, believes there is a high degree of diversity in the technology sector, specifically the wide range of software applications available, particularly in the business to business arena. Lee says: "Businesses are only just starting to embrace e-commerce." He adds technology companies now make up some 34% of the S&P 500, compared with just 8% in 1990, marking them as good long-term investments, despite the fast-moving nature of the sector.
Indeed, there is broad agreement on the importance of e-commerce and internet technologies to the Nasdaq.
Brewis says: "The main driver for the Nasdaq is the blue chip companies preparing for e-commerce, and that trend is still intact."
Paton points to the billions being spent by companies on internet enablement and wireline infrastructure for telecommunications, which will clearly be ongoing for a number of years. All of this, Paton believes, could help the market rise by 20-25% by the end of the year.
Valuations within the sector remain high. However, some managers are discounting the high prices in the belief earnings growth on select stocks may match or even exceed expectations.
Brewis agrees, adding: "Prices are high, but not too high. You can still justify them. The market has correctly discriminated between companies inflated by the internet bubble and the blue chips."
Similarly, Paton says he sees the real weaknesses of the sector are already embedded in equity valuations.There is agreement that companies such as Sun Microsystems, Oracle, Dell, and Scientific Atlanta will continue to enjoy increasing levels of profit growth as the demand for e-business solutions continues apace.
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