Technology stocks to face more pain

Technology stocks are cyclical, according to Salomon Smith Barney Asset Management's chief economist Brian Parker.

"There is a technology cycle, contrary to the earlier belief that tech companies simply produced double-digit earnings growth year in, year out," he told financial planners at a recent Melbourne FPA chapter lunch.

Parker noted that the sale of semi-conductors, which he described as the "raw materials" for the technology sector, were highly cyclical, and tended to follow the traditional leading indicators used to predict so-called "old economy" manufacturing. Moreover, those same leading indicators suggest that the sector is in for further weakness over the coming months.

Parker says many Asian economies derive much of their export income from semi-conductor and technology equipment sales, and that further weakness in semi-conductor sales was likely to adversely affect the economies of Asia.

On the world economy, we are in "for a short, sharp shock", Parker says.

"Some of the data out of the US in the next few months is going to look awful," he warns.

This still poses a problem for equity markets, even in technology stocks, despite the poor performance from the sector over the past year. The problem, Parker says, is that the prospect of a downturn has been largely ignored by US analysts, especially when looking at technology stocks.

"Wall Street analysts are not very bright," he says. "There is a cycle in technology that they haven't adequately factored into their earnings forecasts, so there is going to be more bad news from there."

Parker says that despite the massive correction in technology stocks in the past year, even some of the quality US technology names are still trading at price earnings ratios of 50 to 60 times, which still makes them vulnerable to a further correction.

Speaking at the same event, Zurich Scudder Investments senior vice-president Bill Barbour says the global downturn will be U shaped rather than the V that many economists are predicting.

"The US is heading for recession and with more rate cuts, its economy won't recover until late this year or early 2002," he says. "That is why I am forecasting a U shaped recovery."

Globally, growth in Europe is plunging and Japan is "a basket case", Barbour says.

US GDP is now predicted to fall to between 2.5 and 0.8 per cent and Barbour favours the lower figure. Late last year, economists were forecasting 3.5 per cent growth for the US economy this year.

Barbour believes factors like consumer instalment debt, at its highest for 21 years, will be the determining driver of how long a recession will last in the US.

And as both economists pointed out, the Australian economy mirrors the US and has done for the last 25 years.