The recent sell down in some global technology stocks was not entirely unexpected by sharemarket observers and investors. The "dot.com" stocks in particular have declined with some of the more speculative companies losing as much as 90% of value from their peak. The spectacular rise in the share values of these companies over the last two years was largely driven by momentum, or hype, as investors piled into them hoping to reap short-term gains. The actual business franchises of such companies were often completely ignored.
A fall in the share price of these particular types of companies would not have concerned most professional investors. Many saw a correction as long overdue in this overvalued and select segment. The result of the fallout is a large reduction in the number of mums and dads operating as day traders. Additionally, margin calls that were triggered by the large fall in dot.com stock prices have enforced losses on geared investors and this has taken some of the leverage out of the markets.
However some of the larger, better-established technology stocks that have strong business franchises have also fallen. Why has this happened?
BT Funds Management chief investment officer. Craig Stobo says the reason these more established technology companies have also fallen recently related to sentiment and broader economy issues. As strong economic growth in the US has continued to fuel inflationary concerns the US Federal Reserve has increased interest rates. The rate rises have subsequently triggered the sharemarket sell down. This shake out has helped the Federal Reserve to slow down the economy as it reduces peoples wealth and hence their desire to consume.
Dot.com stocks have suffered most from this decline however negative sentiment has spilled over to more mainstream technology companies. This has created an oversold situation for the better companies which may take a while to sort itself out. In addition to the broad sell down there has also been the impact of the US Department of Justices ruling against Microsoft which has raised potential anti-trust (monopoly) issues for other large companies as well. We believe these conditions are short term and investors should be focussing on the underlying structural shift in business to business information exchange that is occurring.
Technology is reinventing old business models and changing the way that businesses work with each other. The Internet is shifting traditional competitive advantages from the location and ownership of physical assets to information management and control. As an example, the Internet is dramatically reducing supply costs to the automotive industry and this experience is being repeated across all industries. The rate of adoption of the Internet by business is only just beginning.
The future is very bright for those companies supplying infrastructure that is enabling this structural change. Investors in technology shares need to understand this paradigm and be prepared to invest for the long term when they will be rewarded for their patience. The revolution has just begun and investors need to take a long-term perspective. We see the recent volatility is the NASDAQ index in the US as a fundamentally healthy situation. It is healthy because it is removing some of the excesses that were building and it is healthy because it is selective. There is now a clear differentiation occurring between quality and fly by night companies.
The global backdrop for global equities remains positive.
Criag Stobo is the chief investment officer for BT Funds Management
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