Recent rate hikes will set back technology stocks further, according to Scudder's new international ...
Recent rate hikes will set back technology stocks further, according to Scudder's new international investment strategist, Arnim Holzer.
One of the popular myths that Holzer aims to explode is that technology companies are immune to interest rate changes. The massive liquidity levels in the US have helped sustain this idea, but as monetary tightening takes hold technology companies, just as any other, will feel the pinch.
Holzer said: "Many technology companies will be coming back to the markets soon for financing, using both equity and debt. This capital requirement, in the context of Alan Greenspan's interest rate hikes, will begin to weigh down the sector and lead analysts to push companies more aggressively to begin executing against their business plans."
He believes that the days of momentum plays are drawing to a close as liquidity finally starts to drain out of the US market. Holzen is focusing away from momentum-driven stocks and the search for sustainable levels of growth and appreciation and turning to what he calls "technology with a conscience".
He said: "Humans are generally driven by one of two things - fear and greed. Recently we have had no fear. But now it will again become an important part of the investment equation. This is the time for diversification. There should be significant winners in the technology or New Economy sectors that will undoubtedly justify their current extremely high current valuations.
"However, we are also convinced that sector and momentum investing is like musical chairs where the timing of the sell decision determines portfolio performance."
It is not just dot.coms that are using the new technology. There are substantial gains to be made by most companies.
He said: "Technology benefits the old companies as well as the new, but stay away from legacy companies."
These are the companies whose communication structures and employee organisation inhibit the use of technology to increase productivity.
The internet is bringing about a deflationary squeeze on low margin producers of commodities. At this end, price will be everything and only those companies who can stay the cheapest will stay afloat.
At the top end, those companies with the kind of proprietary products that give pricing power and who succeed in a developing a loyal customer base can benefit from the increasing popularity of Ford-style auctioning of outsourcing contracts. Those caught in the middle will suffer.
The runaway US equity market should already have slowed down, but it was supported by the series of crises that occurred throughout the world - the Tequila crisis, the Russian crisis, the Asian crisis. Investors fled to the US and the pattern was perpetuated.
Finally, as much of the rest of the world starts the slow pull up into higher growth, US stocks might start to slow down.
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