9 October 2003 will mark the first anniversary of the upswing of the technology-dominated Nasdaq Index. Since that date it has risen by 61%, comfortably outpacing other sectors of the market, with investors regaining some of the enthusiasm that gripped them at the height of the TMT boom in March 2000.
But appearances can be deceptive. The recovery in TMT must be seen in the context of what went before. For example the Nasdaq Index touched 5048 on 10 March 2000, meaning that, even allowing for its recent recovery, it is still over 60% below the peak. Everything is relative. In this case the boom in TMT shares, which peaked in early 2000, was much more extravagant and extreme than the current situation. Investors have not forgotten the hard lessons learnt during the boom, and subsequent bust, in the TMT boom. A similar situation applies in media and telecoms, respectively the M and T of TMT. According the Bloomberg European 500 Index, the media sector has gained 30% from its low point in March 2003, but is still 63% from its March 2000 peak. For telecoms, there has been a rise of 36% over the past year, but this sector is, nevertheless, some 78% below peak levels. This does not suggest a return to a TMT bubble!
This time around, investors are more focused on valuations and are less likely to be swept away by a wave of euphoria. Technology is exciting, but spending on such products depends on both demand and the willingness/ability of companies to pay for them. One feature of the 2000 tech boom was the high levels of spending on technology products and the willingness of companies to move into debt in order to increase capital spending or the make acquisitions to further their ambitions. The current focus for technology and (especially) telecoms companies is to cut costs and to reduce debt levels. Many companies have transformed themselves, restructuring their businesses and changing their managements. So, for example, in Europe, all the major telecoms companies, from Telecom Italia to France Telecom have seen changes at senior management level.
Our caution about technology stocks after their recent rally is because we think that, in most cases, valuations are too forward-looking. However, we are much more positive about media and telecoms companies, which are attractively, priced relative to future profits prospects in a recovering global economic environment. In contrast to 2000, it is possible to buy good quality media companies, like Reed Elsevier or VNU, on price earnings ratios of 14 times or less. This is much lower than valuations prevailing in 2000.
If the technology boom of 2000 was Mount Everest, the current situation resembles little more than the foothills. Expectations are more realistic and selective buyers can find good value within TMT sectors.
Greg Kerr, Manager of M&G Global Technology Fund
