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An eerie resemblance to 2000: five wealth insights on a tech bubble
by Anna Dumas on Apr 30, 2014 at 13:38
We ask five of our readers whether they believe history is about to repeat in the technology sector.
There's been plenty of talk about a technology bubble of late, which is no surprise given the sector's rise over the last few years and its somewhat chequered past.
But is history repeating? The volatilty at the start of the month gave some reason to fear the worst.
We speak to five experts to get an insight into how they view this most sensitive of sectors.
Daniel Lockyer, senior fund manager, Hawksmoor Investment Management, Exeter
‘Is there a bubble and is it specific to tech? Markets generally are trading at elevated valuations. We are now at a point where if any company on a high multiple disappoints, shares are marked sharply lower.
‘Recent examples include tech stocks but there have been others. However, if there is a tech bubble now, it is very different to 1999. Today it is a real industry that is integral to our everyday lives, full of highly profitable businesses.
‘Valuations still remain the critical factor though, as it is very difficult to value new and fast growing businesses. Technology companies such as Facebook or LinkedIn could justify valuation in the way that Apple, Amazon and Google turned out to be great investments in the 2000s.
‘It is also important to avoid the losers – “incumbent” companies that do not adapt or simply call the market wrong (Nokia, for example).’
Darron Preston, investment manager, European Wealth, Cheltenham
‘We have watched, open-mouthed, the run in technology “story” stocks over the past year. “Has everyone forgotten the TMT bubble?” we asked.
‘We get the potential, we just don’t get the valuations. The run in the sector has been fuelled by giants throwing around overpriced stock.
Looking behind the headlines and at the actual cash element of the deals, we get a much more sober valuation – still staggering numbers but you can almost make a case for them.
‘So where does this leave us? Are all technology stocks disasters waiting to happen? Of course not.
There are always good quality technology companies to invest in. Investors have to take a sensible view of the risks and make their own judgements – or close their eyes, leap onto the runaway train and hope they can jump off before it hits the buffers.
‘As I’ve said, the market looks all too familiar.’
John Goodall, research analyst, WH Ireland, Manchester
‘Business owners have rushed to take advantage of positive investor sentiment and the recent flood of IPOs in the tech sector is testament to this.
‘The focus on unprofitable companies with unproven business models may well indicate the presence of a bubble. Following a strong run in technology, investors have now started to question the astronomical ratings ascribed to these stocks. While stocks such as Twitter and Facebook could yet prove successful in the long run, investors are taking a great leap of faith paying many multiples of their expected earnings.
‘The same applies to the likes of recent UK flotations Just Eat and Boohoo. While we cannot be certain the bubble has yet burst, it would appear that the risks certainly outweigh the potential returns.
‘With the Nasdaq showing an eerie resemblance to 2000, investors would be advised to remember that this time is unlikely to be different.’
Geordie Kidston, senior research officer, JM Finn, London
‘Growth in the UK and the US – with the latter affected by weather patterns – is picking up fast. This has increased interest rate expectations and short sterling futures are now discounting 0.7% interest rates by December. ‘This distorts the long-term discount rate and long duration assets suffer volatility and price setbacks, as these factors are discounted into the long-term growth rates.
‘There are four main areas of technology that are still nascent: datastores, analytics, new applications to apply data, and integration costs.
‘Given the need for billions of pounds worth of info tech upgrades and integration expenditure required for all this, the sector is in strong shape. We see recent volatility as part of the gradual encroachment of the interest rate cycle onto long duration assets and the recent setbacks may offer buying opportunities.’
Tim Gregory, head of global equities, PSigma, London
‘Over the last few weeks, some of the froth that had built up in the technology sector has been blown away.
‘It is,of course, inevitable that after a blistering run for new technology areas such as social media and a string of optically high priced acquisitions and expensive IPOs that investors will raise the question of whether we are in another tech bubble.
‘There is no doubting the importance of social media companies such as Facebook and Twitter. However, what is difficult is correctly valuing their equity. Facebook is now valued at around $160 billion (£96 billion) but if it turns out to be as successful as Google, it could conceivably be worth every cent.
‘The point is that there will inevitably be winners and losers from the latest digital revolution and the “internet of everything” but the fact is that not everything can win, and apparently low barriers to entry make it especially difficult to decide which valuations are justified.’