`Old stock' stages recovery

In recent weeks the apparently unstoppable rise of the telecom, media and technology (TMT) stocks would seem to have come to an abrupt halt. Whether this marks the beginnings of a reversal of fortune for the "old-economy" stocks remains to be seen.

Nevertheless, the switch in investor sentiment over a short space of time towards financial and industrial stocks has been substantial.

For example, in the space of a few days last week, the Dow Jones index rose by more than 7 per cent compared with a fall of more than 5 per cent in the technology laden Nasdaq. In the UK, the debut of the nine new entrants to the FTSE 100 index was marked with declining share prices. On their first day's trading as part of this premier index, seven of these mainly technology companies declined in price. The Republic's Baltimore Technologies was one of the seven, falling by more than 4 per cent on the day.

Closer to home the reversal of fortune has seen a welcome recovery in the banks' share prices. So far this month the Irish bank index has outperformed the industrials index by around 10 per cent, while Fyffes provided another indication of some return to traditional fundamentals.

The fruit distributor had seen a remarkable rise in its shares on the back it of its move to establish a business-to-business Internet portal. However, a profits warning regarding its core business at its recent annual general meeting has seen the shares beat a hasty retreat back to the 220 cent level. Despite all the hype surrounding the new economic paradigm it seems real profits still matter.

While the explanation for the sharp decline in Fyffes share price is clear-cut, there is not an obvious catalyst for the sudden decline in the levels of the high-profile international technology indices. In general, financial reports from many of these companies have been quite good.

Sales growth has remained extremely strong and mergers and acquisitions have continued apace. Heavy up-front development costs mean that many of these new companies have yet to make a profit, although the profits of the longer established TMT companies are growing very rapidly.

It is true that interest rates are rising and this upward trend seems set to remain in place for the foreseeable future. Up to recently, higher interest rates would seem to have had little impact on the share prices of these high growth companies.

The majority of these companies have been able to grow through the issue of highly priced new shares and therefore they enjoy quite healthy balance sheets. However, even though these high-tech companies have not relied heavily on debt, it does seem that many investors have been relying on debt to fund their share purchases. In the US the amount of debt lent by stockbrokers to their clients to fund share investment has risen very sharply. Some brokers have tightened up on their lending criteria and the US Federal Reserve has expressed some concern at this build-up in debt.

It would also seem to be the case that many hedge funds have borrowed heavily to invest in the high-flying technology shares. It is likely that higher interest rates will eventually lead both private and institutional investors to liquidate some of their investments in order to reduce their debt.

Until interest rates have peaked it may well be the case that the rotation out of the highly valued TMT stocks into the "old economy" stocks has further to run. However, given the ongoing rapid pace of technological development it is likely that the longterm growth prospects of the TMT stocks will continue to attract a fair share of investor's funds.