By David Whitely Swiss private bank Pictet & Cie has warned that the rise in internet stocks has par...
By David Whitely
Swiss private bank Pictet & Cie has warned that the rise in internet stocks has parallels with the biotech bubble of the mid-1990s and the Japanese real estate boom of the 1980s.
Edgar van Tuyll, chief strategist, said that the rise of internet and new economy stocks could not be explained by conventional methods such as expected earnings or interest rate levels.
In 1997 the Datastream Internet Index rose some 171.8% in dollar terms, climbing a further 470.4% in 1998 before posting a 161.3% return last year.
He added: "Internet-related stock prices have delivered the highest returns ever seen on an exchange. It is difficult to say when but it is exceedingly likely the stock is headed for a fall."
The present boom has plenty in common with previous bubbles over the past few decades.
"Historically, a recurring phenomenon can be observed," van Tuyll said. "From time to time a single sector stands apart and achieves much higher returns than the rest of the market.
"In the past, it has been the biotechnology companies in 1995, or Japanese real estate related sectors in the late 1980s, or the US 'nifty fifty' index heavyweights such as Kodak and Polaroid."
They all experienced a surge in returns, and this surge ceased to be explainable by conventional measures such as earning figures, growth, or interest rates.
"This does not mean the stocks move at random," van Tuyll said.
"In fact, a very strong relationship can be observed historically between these stocks and excess liquidity. By excess liquidity, I mean a situation where credit grows faster than the economy."
Van Tuyll said his research had shown a strong long-run relationship exists between variations in excess liquidity and internet stocks.
The market conditions necessary to fuel the growth of high return sectors are a growing economy where interest rates and inflation are falling which leads to an appetite for risk, according to van Tuyll. In this situation, markets turn to "flavour of the month" stocks, and the flavour at the moment is the internet, he said.
The question of whether this month's flavour will sour as its predecessors have may depend on interest rates as a hike may lead to a reduction in excess liquidity, according to van Tuyll. "Excess liquidity should fall when the main central banks raise official interest rates, as we forecast they will" he said. When excess liquidity eases, van Tuyll forecasts a fall in internet stocks.
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