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US stays cool as tech stocks feel the heat

The overvaluation of American tech stocks, which triggered last month&#39s

overdue adjustment, has left US markets uncertain and looking volatile.

With the technology sector having grown at a remarkable speed in the past

year and now making up around 35 per cent of the S&P 500 index, fund

managers found tech stocks hard to resist.

Despite many funds making an effort to offload some of their technology,

media and telecoms stocks in anticipation of a market adjustment, many were

still overweight in technology when the crash fin- ally happened.

However, the resounding mood from across the pond continues to be one of

optimism towards US tech stocks, with few funds offloading TMT in reaction

to the April crisis.

Hargreaves Lansdown head of research Mark Dampier believes the speed of

growth in the sector has left TMT unavoidable.

He says: “Some of the tech companies are growing at 30 per cent per annum

and they are likely to continue doing so for a few years. TMT is probably

due for ano-ther fall but you cannot write it off. In the long-term, I

would definitely favour it above the other sectors.

“At the moment, however, I am not in a great rush to invest anywhere. I

believe that the summertime will be slow and investors would do best to

wait. If I was going to invest anywhere, I would be more tempted by

emerging markets than America right now.”

Threadneedle&#39s American select growth fund, which is ranked among the top

10 performers in the US, remains overweight in TMT.

But although fund manager Steve Arnold has been running down the fund&#39s

tech investment for much of the year, he remains positive about the

long-term effects of the fallout.

He says: “We were cer- tainly surprised by the size of the

technology stock adjustment but the US has a competitive advantage in the

tech sector, so we will continue to invest there.

“What we have seen over the past couple of weeks is a broadening of the

market. In mid-February, we were seeing some extreme speculation, where the

concept stocks were being bid up to crazy levels. But since then, we have

seen the old economy begin to perform much better again.”

The bigger worry for many investors has been the imminent rise of interest

rates. Although a May rise is inevitable, investors are unsure as to

whether Federal Reserve chairman Alan Greenspan will opt for a quarter or

half percentage point rise.

Furthermore, there is no guarantee that the rise will be the peak of the

recent rallying of federal rates. Although many fund managers say now is

the best time to buy into the US market, doubts over interest rates have

put a hold on any immediate investment, which could be a major worry.

If US inflation fails to respond to an interest rate rise, any further

rises could begin to inflict long-term damage on the markets. In the last

quarter of 1998, it was a series of interest rate drops which helped the

US market to rec-over from the autumn slump.

Credit Suisse, whose Transatlantic fund has performed consistently well

over the long and short term, attributes a big part of its recent success

to an avoidance of not only tech stocks but also the more interest

rate-sensitive stocks.

Credit Suisse Asset Management UK managing director Ian Chimes says: “We

have been underweight in technology for a while and we are now also

dramatically underweight in areas such as financial services, which will be

sensitive to an interest rate rise.

“The fund is founded on consistent stable growth stocks, which in many

cases have multinational exposure. The principle is that they will benefit

from the growing global economy which will offset any slowdown in the US

markets.

“We have found that tech stocks do not have a worthwhile risk/reward

trade-off. The rewards do not justify the prices that the stocks have been

trading at and the future earnings expectations have been unrealistic.”

A £1,000 investment in Credit Suisse&#39s Transatlantic fund three years ago

would now be worth £2,215 comp- ared with £2,620 with Threadneedle&#39s

American select growth fund and £2,960 with Fidelity&#39s American fund.

But the same amount invested over only the past three months would return

£1,034 from Credit Suisse while those who had opted for Fidelity or

Threadneedle would be left with a negative return of £913. These figures

are a clear indication of each fund&#39s technology weighting and have in the

short term rewarded those who resisted the call of the bull tech market

over the past few months.

Although fund managers are currently favouring European and UK markets for

the short run, many are less than convinced about its strength against the

US in the long term. The reality traders are continually faced with is that

Europe and the UK are still led by the US.

Rothschild Asset Management assistant director Rob Burdett says: “The fact

is that the UK and Europe continue to suffer from morning-after syndrome

from the US. The correction has been harsher over here. Markets such as the

Neuer market have fallen much further than the Nasdaq.

“US funds are still a safe place in which to invest. Most of the trusts

that do hold tech funds tend to be stocks from real companies earning

repeatable profits – firms like Cisco rather than Amazon.com. We still have

more money invested in the US than any other market.”

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