Serious Money: Equity markets had a flying start to the year: stocks had a proper "January effect" during the first week of the month. This mostly global phenomenon was led by tech stocks, with the Nasdaq up a whopping 4.5 per cent in the first few days of trading.
The broader US indices managed a near 3 per cent first-week jump, as did many European markets. Japan continued its stellar run and Hong Kong put in a 3 per cent-plus rise. Even China, in a reversal of stock market behaviour of the past couple of years, almost managed to match the Nasdaq (one of the Chinese economic miracle's curiosities is its failure to have driven the stock market forward until now).
Europe does not have much of a technology sector, at least when compared to the US, so it is harder to be sure that tech stocks are providing "leadership". But the IT hardware and electronics sectors both topped the performance league tables during the first few days of the new year. Within IT, one of the best performing stocks at the end of week one was Nokia - more on this company in a moment.
Tech stocks are running for a number of reasons. First, old fashioned cyclicals had a great 2005, buoyed by economic recovery in general, improved capital spending in particular. Industrial companies like Atlas Copco enjoyed 70 per cent rises last year. If the capital spending story evolves like it should, it will sooner or later move on from old economy plant and equipment to hi-tech kit.
That should happen without any technological innovation, which often boosts demand for tech equipment in an obvious and natural way. The case for higher tech spending does not need a replacement cycle boost: the need to get rid of worn-out kit and replace it with new stuff. Tech doesn't need these latter forces, but it helps if they are around.
And the reason why technology stocks are starting to do well is that all three forces are suddenly starting to play out: good old cyclical forces, loads of new and exciting stuff coming onto the market and the realisation that many of us are using kit that is starting to get close to its sell-by date.
Take mobile handsets. At last week's Consumer Electronics Show (CES) in Las Vegas, part of the buzz was about the need for handsets that roam seamlessly between networks and, where available, cheaper internet-based networks such as home VOIP networks. Industry folklore has it that 50 per cent of mobile calls are made at home (Serious Money could get politically incorrect about the reasons for this, but will resist the temptation). The technology exists such that those home-based calls, at the very least, can be switched to zero cost IP-based networks. Hence, all the handsets in existence globally are already obsolete. Believe this and you buy Nokia, amongst others.
Two leading investment banks upgraded price targets for Google, tipped by Serious Money at its $85 (€70.40) initial public offering not so long ago (and trading in excess of five times that level after the new year rally). Somebody apparently claimed that the stock could ultimately rise to $2,000. Google's Larry Page made a keynote address at the CES show, revealing that the company intends to be at the forefront of the other great theme for 2006, namely video. If this carries echoes of the hype surrounding the internet bubble of the late 1990s, don't be put off too much. While it is always difficult to discern myth from reality, it seems that there is enough weight behind some of the new ideas for this to be more real than last time. But analysis is hard. What is Google worth? I haven't the faintest idea, and neither does anybody else.
One of my favourite tech bloggers recently paid homage to the great internet bubble and wondered why so many people fear another frothy market. After all, he argues, the last one was a great deal of fun. While such an attitude verges on the irresponsible, I can see what he means.
All of this is about putting pieces of an incomplete jigsaw puzzle together and jumping to investment conclusions. What we need to believe is that there is going to be enough innovation in products like video downloading for Google to make another killing. We also have to believe that if video isn't the next new thing, then Google will be on to it, whatever it is. Too rich a bet for most sensible investors, but Serious Money is happy to stay long on Google shares.
More prosaically, for companies like Nokia, we need to be confident that spending on its core products is set to surge. For handset makers and network equipment that, to me, looks like an eminently sensible bet: technological change is creating the demand that will generate a replacement super-cycle.
Notice that the investment case for Nokia is based on top-line growth - sales. I have not said anything about whether that growth will be particularly profitable or whether it will be sustained. "Proper" investors always like to ask those sorts of questions. But if Nokia's sales surprise this year, so will its share price and sober investors will once again shake their heads and mutter about the madness of markets.
Chris Johns is an investment strategist with Collins Stewart. All opinions are personal.
