The hi-tech facts that may prove painful for markets
by ANDREW SMITHERS. Chairman of fund manager advisers Smithers & Co
thisislondon.co.uk
Steve Ballmer, the president of Microsoft, recently announced that hi-tech shares were overpriced. Shares fell and it was reported that Wall Street was shocked by the news.
It obviously was not, as nearly everybody has been saying the same thing for some time. The shock was neither that hi-tech shares were overpriced, nor that anyone should say so. What was shocking was that the president of Microsoft should join in. Wall Street clearly believes that dog should not eat dog.
The interesting question is why no one appeared to be acting on information that everyone had. Why, if hi-tech shares were so overvalued, did their prices ever get so high? It doesn't seem a very good advertisement for the fund management business.
As more and more money is run by fund management companies, there is a growing concern that the impact on stock markets is malign. The fear is that as money is increasingly managed by people who do not own it, the sillier markets are likely to become. The reason this happens, is that the risks for the owners of the capital are different from the risks that the fund managers take.
Economists are divided as to whether it is possible to tell when shares get overpriced. I think you can, but many economists think you cannot. Either way it's obvious that fund managers cannot tell when markets will peak.
If we knew when, or at what level, the market would peak, we would all sell in advance and the forecast would be wrong.
Sellers take the risk that they could have sold at a higher price if they had held on. This risk is very different for owners and managers. If it is your money, the risk you run of staying in the market is getting poor. When markets are dangerously high it makes sense to get out, even if they may go a lot higher. For fund managers the odds are the other way around. Even if they know that markets are over the top, they risk poverty by selling not by staying in. If shares go down, they don't lose, but their clients do.
If they sell and the market goes up, they lose their jobs. Small wonder that many fund managers today are fully invested for their clients, but liquid in their own portfolios.
This is why Steve Ballmer's comments are important. They raise the risks for fund managers of being in shares.
Shares in general are wildly overpriced and hi-tech is just the bubble on the bubble. Nonetheless fund managers felt the need to have some hi-tech shares in their portfolios, as a form of insurance.
If the market goes up, in spite of being wildly overvalued, why should hi-tech not outperform even if it is the most overvalued sector?
If everything is mad, how do you choose? It is hard to see why relative rationality should produce good results in an irrational market.
The insurance element in having some hi-tech shares becomes more dubious when they are being rubbished by Microsoft. It starts to be brave to hold them, rather than risky not to. Hi-tech become goodbye rather than a good buy. The risk is that what is true for hi-tech could also be true for the market. |
