ANALYSTS: GREENSPAN RATE WARNING SPURS MOVE INTO TECH STOCKS
By Mark Pender
NEW YORK (MktNews) - Federal Reserve Chairman Alan Greenspan's warning Thursday of significant rate hikes ahead has raised the chances of further rotation into U.S. technology shares, some analysts say.
The surge in technology stocks at the expense of non-technologies has coincided to a large degree with expectations for higher interest rates. Worries that rates would go higher into 2000 first emerged in early December and had clearly firmed by Dec. 14 after the surprising 0.9% jump in November retail sales.
Since the beginning of December, the Nasdaq Composite, an index heavily weighted toward technology, has risen more than 35% while the Dow Industrials, an average balanced the other way, has slipped over 4%.
The technology battle cry contends that demand surrounding the Internet is non-cyclical, based on the momentous promise of the new technology. The sector's strong productivity and its reliance on share-issuance as opposed to bank borrowing give it further protection against higher rates.
The victim? The rest of the market. Dealers thought a post-New Year selloff in the Nasdaq was the beginning of a counter-rotation, but a strong December jobs report that included a higher-than-expected rise in average hourly earnings rekindled rate worries and put new premiums on non-cyclicals.
After Greenspan's hawkish Humphrey-Hawkins testimony, some see more of the same ahead.
"Right now technology companies are in such a tremendous growth phase that interest rate hikes really aren't going to take too much of the wind out of their sails," said Joe Abbott, senior equity strategist at analysis-firm IBES. Abbott says annual earnings growth in technologies, three years and running at 20-plus percent, is "in a sweet spot."
In contrast, brick-and-mortar firms average just above 10% earnings growth, and more importantly their demand base is generally vulnerable to interest rate swings. He says basic material companies and traditional retailers will be especially squeezed by an economic slowdown. "Given the separate outlooks for demand between technologies and non-technologies, the earnings divergence will continue," he said.
Universal demand is the bedrock of technology's strength. Consumer demand is just dawning, while business demand is well established and the sector's best hope in a slowdown. "This is a once in a lifetime change, and businesses that don't use the new technology, no matter how rates look, are not going to survive," Abbott said.
The other side of the tracks of course is suffering from what many say is disinvestment. Henry Hermann, chief investment officer at Waddell & Reed, warns that "momentum players" are distorting market valuations and shifting the balance from value companies to growth companies."
Abbott concedes that markets overswing by nature and agrees that a counter-rotation could be in the cards. But he continues to recommend technologies whether the investment horizon is 10 years or 10 minutes. "If we see a pullback, take it as a buying opportunity," Abbott advises.
Dealers and analysts agree that portfolios must have a significant weighting in technologies, but warn that groups within the sector may respond differently to higher rates. Hermann, a veteran technology analyst, warns especially about boom and busts in semiconductor shares related to economic cycles, while others warn about a possible rate-related slowdown for the personal computer makers.
But many agree that web-enabling firms, specifically those that write software or make backend equipment, are most likely to rise however the Fed s monetary policy unfolds. Also considered immune are broad-band companies or related equipment makers that are building the telecommunications foundation of the web.
As rates go up, non-cyclicals will continue to benefit at the cost of cyclicals, and the non-cyclicals that do best will be the ones where underlying product demand is strongest. As Abbott says, "You have to put your money where the earnings are." |
