Comment Articles

Marconi: The other boot drops...

Guy Kewney AnchorDesk

Published: 05 Jul 2001 13:02 BST

When "analysts" expect a company to make a four million pound loss on a year's trading, and the company says: "Actually, we think you should make that a hundred million" you can expect panic.

I'm not panicking. I did all my sweating about two years ago, in the middle of the dot-com boom. I knew the economy was getting into bed, because -- like an awful lot of financial traders -- we'd heard the first boot hit the floor upstairs.

Today's news is just the other boot hitting the floor. What has happened since the crazy days of dot-com shares which were worth more than oil shares, is that a lot of people have been living in a dream world, in which the anomy wasn't actually getting ready to lie down, but was just checking its socks for lumps. They've been in denial. Now, at last, they're prepared to face reality.

Reality is, as it always was, that there will be no massive resurgence in the European economies this year. And that particularly applies to companies in the high technology sector -- communications, computers, consumer electronics.

Reality is also that technology stocks are still being expected to produce financial returns that are higher than the returns from the stock market as a whole. People have been expecting them to grow faster than they can, and to make more profits than is possible. As Keith Woolcock of Nomura so concisely put it for Bloomberg TV, "until the Nasdaq stocks are trading below the level of the rest of the stock market, there's no reason to buy tech stocks."

And the future of high tech is based on well-understood indicators. For example ASM Lithography makes the equipment which silicon foundries buy in order to make chips. They expect to see continued downturn; the chip makers have stopped buying their silicon printing equipment. Until they start getting orders for new equipment, there can be no growth in production capacity.

In fact, the reality is now, perhaps, not quite as bad as the City analysts are currently saying. There's a big difference, in my mind, between "stocks worth buying" and "a good, sound business."

Take ARM -- makers of the RISC processor in most mobile phones. Rightly, people recognise that the mobile phone market is under a cloud, and that prospects for ARM are therefore less shiny than they seemed to be when Orange and Vodafone and Cellnet and Virgin and everybody was racing to give phones away in order to "build market share."

So, logically, people don't expect the ARM shares to go up in value; and so they will look to sell them.

But that doesn't mean that ARM is going to go out of business! People are still buying phones; just not in such big numbers.