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Investment View

You can go off people. Thinking that all I had to write about last week was the first set of quarterly earnings figures from the US, I was well on track to deliver several pages of well honed text when along came Mr Greenspan and his propensity to surprise. Out go the quarterly earnings as a focus of attention – in comes the real state of the US economy.

America watchers are divided at present between those who take last week&#39s surprise 50-basis-point cut in American interest rates as confirmation that the Greenspan”put” is alive and well and bailing out investors all over the States, and those who wish to know what it is that the Federal Reserve Bank knows that the rest of us do not.

If they were hoping for clues from the earliest of the US quarterly results last week, they were sadly disappointed as the picture was somewhat mixed. Both Intel and Cisco made much of the way that business had suddenly fallen off a cliff but Microsoft succeeded in putting up its profits against market expectations. Admittedly, this was not by much but the market took it as an encouraging sign nonetheless.

The adjustment from a high-growth economy to one where the rise in GDP is more likely to be close to the long-term trend is proving difficult for American investors. Lower interest rates and low and stable inflation allow a more demanding rating to be applied to equities but unfortunately there are still plenty of sectors in the market where, despite the carnage of the past 12 months, valuation levels still assume levels of growth that are probably unobtainable for some time to come – perhaps never.

Taking Cisco as an example, even though the shares have lost more than four-fifths of their value over the past year, the price/earnings multiple at more than 40 assumes a steady, high level of growth – yet this year&#39s profits will be lower and it is by no means certain that this is a blip rather than the end of an era for a company that built its business on servicing the internet infrastructure. The fact that it is in a position to lay off more than 8,000 workers shows just how big it and a number of other high-growth technology companies have become. Like supertankers, they are proving difficult to steer through the choppy waters of an economic downturn.

What does this mean for technology funds? Probably that they will be even more difficult to manage than they have been in the past. Technology is still a growth industry but change comes ever faster and companies will mature in this business as anywhere else. The smaller technology com-panies will retain a degree of flexibility and the propensity to surprise on the upside probably denied to the bigger operators. Unfortunately for the tech funds, it is the big boys who enjoy liquidity.

It is interesting to look back at technological leaders over the years and to realise that few companies remain at the forefront. Perhaps the one exception is America&#39s General Electric. It was there at the top of the tree at the beginning of the last century and is presently the world&#39s most valuable company in terms of market capitalisation. This time last year, it was Microsoft which headed that list but it has been driven down into third place – still not a bad result.

You can list companies using any criteria you chose but what is impressive about General Electric is that, no matter which criterion you apply, it features high in the rankings. Third in terms of profitability, fifth for revenues, sixth for assets – Mr Welch and his team have done a good job. But what really defines this company is the fact that it has changed shape over the years, adapting to each new environment as it develops. There is a message for com-panies in every industry in such an approach.


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Simon Fletcher

Auto-enrolment: pay attention or pay the price

By Simon Fletcher

As a chief executive officer of a business in the financial services sector, I have been dealing with the introduction of auto-enrolment for our clients for some time, but I can also speak from an employer’s point of view, having to go through the process ourselves.


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