It's time for fundamental analysis to take centre stage again." So trumpeted an American investor as he poured scorn on those who had recklessly pushed the value of high-technology stocks to the stars - then panicked last week as those stocks began their return to Earth.
The American would doubtless feel a similar disdain for those New Zealand investors who yesterday acted with similar lemming-like fright as the local sharemarket slumped 4.7 per cent. So devoid of logic were their actions that even stocks which lately had been demonstrated to be undervalued were marked further down.
Air New Zealand "B" shares, for example, slipped 40c to $2.25, although Singapore Airlines had only days earlier been buying them at $3. Likewise, Fletcher Challenge Paper slipped to $2.26, although Norwegian company Norske Skog has offered $2.50 a share to buy the company. And where was the logic in Telecom shares being dumped 47c to $8.63 when only a small part of its revenue is related to the new technology?
The fundamental undervaluing of New Zealand shares - a consequence of a long period of lethargy - and the relatively small number of high-technology stocks should have sheltered the local market from the deluge created by the bursting of the Amer- ican high-tech bubble. Panic, however, owes nothing to logic. When it takes hold, the most solid of stocks is not immune.
If there was carnage in Australia, it was rather more understandable. There, many a mining company has transformed itself into a high-technology stock, switching its speculative prospecting from terra firma to cyberspace. Unlikely alliances have been formed in the name of opportunism.
And, as in the United States, there was only the flimsiest of grips upon the reality and economics of Internet-related commerce. The true beneficiaries of the new technology had not been accurately discerned. Illogically again, newly listed companies suffered more than most when the axe fell on Australian high-technology stocks yesterday. Panic, not prospective earnings, determined their fate.
A more realistic assessment of such stocks will be the most obvious outcome of the tumult of the past few days. The danger is that the process, aided and abetted by rising interest rates, could send the American economy into recession. That country's astonishing economic expansion over the past decade has been fuelled by the wealth generated by its booming sharemarket. The momentum at one point led the Federal Reserve chairman to speak of irrational exuberance.
All stocks, especially those that are Internet-related, no matter their seaworthiness, rode the crest of the wave. Now the momentum has stalled, a victim of the reassessment of sky-high valuations and worse-than- expected but hardly grievous inflation figures. If the spring disappears from the American step, the rest of the world will slow down. The implications for New Zealand's export growth are obvious.
Wall St investors will quell global anxiety if they respond calmly and logically to the Nasdaq's 9.7 per cent plunge last Friday - if they allow the fundamentals to again take charge, and if they recognise a return to reasonable valuations for what it is and shine a stronger light on more traditional and less speculative stocks. The reporting of many first-quarter corporate earnings this week should concentrate that focus by confirming the good health of leading companies.
Some New Zealand investors are clearly spooked by the possibility that panic will triumph over prudence and the probability that local interest rates will soon rise. Thus, they fuel the possibility of a major collapse. They also forget two of the most important lessons of sharemarket investing: that it is a long-term venture; and that a falling market offers the best buying opportunities. Some high-technology stocks will fall further but the fundamentals all point to a correction, not a calamity.
<i>Editorial:</i> Very little logic in stockmarket drop
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