US and Europe hold the key for investors

With the UK market continuing to prove volatile, following the trend of the Nasdaq, investors are waiting to see the implications of key economic figures released in the US and in Europe before committing themselves.

As a result, the IPO market has slowed as it did after the last stock market slump in 1998.

However, some recent IPOs that did get priced have performed well, despite the cautious mood. Adrian Gosden, fund manager with SG Asset Management, says: "Companies that have an enabling capacity can still prosper against a falling market."

He gives the example of Bookham technology, a UK-based company that designs, manufactures and markets optical components based on silicon chips. It began trading at £10 and soared to £32 before slipping back to around £18 by the end of its first week of trading.

The success of the Bookham stock is because its technology promises to provide a much greater system capacity for telecommunications, according to Gosden. Their components manipulate the light source in fibre optic networks, which allow for a much greater volume of information than can be handled by copper networks.

Gosden sees companies such as Bookham and Arm Holdings as attractive because they supply the technological infrastructure for the rapidly growing telecommunications industry.

A huge amount of investment continues to pour into this industry at the moment, most notably seen in the spectacular bidding war for third generation mobile phone licenses.

With stocks such as Vodafone Airtouch suffering from worries about the final cost of the bids, it seems that the most attractive companies at the moment are the ones that provide the enabling technology, rather than those who are hoping to exploit it.

But while tech stock selection becomes a more difficult and refined business, traditional sectors are looking for a lift in their fortunes. The manufacturing sector, for example, has been waiting for the strength of sterling to finally give out.

But it is the strength of sterling that has stopped the MPC from aggressively hiking interest rates, according to a Schroder SalomonSmithBarney report. It also says the risk of relying on a high pound to offset inflationary pressures is that the current account deficit will worsen and will become harder to finance because of reduced inflows of direct investment.

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