The Nasdaq index has more than halved in the past year since the technology bubble burst, and there may still be some more downside yet, Henderson Global Technology fund manager Stuart O’Gorman warns.
He says there are two problems affecting earnings. The first is a transitory problem of tough comparisons and the second is a more worrying economic slowdown.
In the last two years there was a massive increase in spending on technology, driven particularly by dot.coms and next generation telecom carriers, with IPO and debt raised cash burning a hole in their pockets. These companies have now run into massive financing difficulties, as their business models have not proved viable.
"Unfortunately, the providers that sold the infrastructure to these companies are now facing very difficult comparisons as this spending vaporises.
"If this were the only problem the market could start looking through these disappointments, towards the easier conditions next year with the impending cuts in interest rates and taxes," O'Gorman says.
The far greater worry is the health of the US economy. Companies are making major cuts in capital spending, especially on projects with long installation times, high initial cost or low visibility in the actual value added by implementing the technology. Most technology spending, whilst adding value, is in the end discretionary.
This has been shown with some of technologies sacred cows such as EMC, Cisco, Sun Microsystems. All of these companies have been forced to dramatically reduce earnings forecasts due to weakness in enterprise as well.
"If the US economy goes into a full-blown recession then the Nasdaq has a lot further to fall.
O'Gorman doesn't believe that US Federal Reserve chairman Alan Greenspan truly feels that the line that 'this time it is different'. That the more lean US corporations will slash inventory and jobs very quickly and returning the economy to a balance of supply and demand. Greenspan, he says, is simply trying to talk up consumer confidence.
The best way that he and President George W Bush can do this is by putting money back into consumers’ pockets and by propping up the Nasdaq.
"For the Nasdaq to rally we need to see further significant interest rate cuts and a reduction in taxes. This does provide a lot of downside support to the market as participants know that this will happen, however, they are unsure of the timing and consequently are afraid to sell too heavily."
O'Gorman says that whilst earnings estimates have further to go down it may be time to grit your teeth and buy.
"Investors have the opportunity to pick up franchise names in technology, whose secular trends are intact, at reasonable prices against their long-term growth prospects," he says.
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