In the past six months we have seen incredible volatility within markets, with telecoms, media and t...
In the past six months we have seen incredible volatility within markets, with telecoms, media and technology bearing the brunt of it.
Over the past two years an investor in the UK technology sectors would have almost tripled their money on an absolute basis. Compare this with the FTSE All-Share overall where the index is just up a meagre 7%. In fact if you strip out the telecoms, media and technology sectors altogether the FTSE All-Share is actually down on where we were two years ago.
Changes in the UK indices also have had an effect. A year or so ago Baltimore Technology was a small cap stock. If fund managers didn't hold it, it wasn't going to destroy overall fund performance. Now of course Baltimore is a FTSE 100 stock. To ignore it is now a far bigger bet. After all it could be the next Microsoft.
So what suddenly changed market sentiment? A combination of events led to a sudden and sharp correction in all things tech related both in the US and the UK. The US anti-trust investigation into Microsoft, the relative failure of some recent high profile IPOs and adverse press reports on the amount of new capital going into tech start-ups, led investors to reappraise their portfolios and perhaps for the first time to realise that tech stocks were not all a sure thing and that they could actually go down as well as up.
Despite the recent correction, valuations remain high. Although there has been a partial reversal of the extreme valuation gap between, for example, ARM and Scottish and Newcastle, it is still substantial. On 10 March the Nasdaq index was trading on a P/E multiple of 185 times. It has since fallen to 150 times. The US market as a whole trades on 23 times. Yes, this approach is very simplistic, and yes P/E ratios are unfashionable these days. However, it is still a massive differential. In normal market conditions expansions in P/E multiples are driven by rising earnings forecasts rather than the share price alone.
There are still substantial profits to be taken. The UK telecoms, media and technology sectors are up approximately 50% relative to a year ago, and there is massive new investment being ploughed into tech start-ups. The market will therefore continue to be concerned that the expected returns implied by current share prices will not be achieved, particularly against a background of rising interest rates in the US.
Stock selection will become increasingly important. There will be winners and losers in every industry, regardless of sector. Longer term, we remain selectively positive on telecoms, media and technology sectors as exposure to the internet and mobile data will produce far higher earnings growth than the average UK industrial company.
This is particularly attractive given the relatively benign global inflation outlook. In the shorter term, however we would still expect the current volatility to continue while the market sorts out relative valuations.
Karen Robertson is investment director at Standard Life Investments