As the wild swings on international stock markets continue unabated, investors face increased risks as well as opportunities. Last week poor third-quarter revenue results from IBM released on Tuesday after the markets closed, together with concerns about inflation and slowing corporate earnings in the US, sparked another bout of market nerves.
In the first hour of trading on Wednesday on Wall Street the Dow Jones Index dropped sharply, falling below the 10,000 level for the first time since March. The technology-heavy Nasdaq Index fell by almost 6 per cent in early trading. The Nikkei in Japan, the Hang Seng in Hong Kong, the FTSE 100 in London, the ISEQ in Dublin as well as other European markets all dropped well back in nervous trading.
On Thursday there was a rebound driven by bullish reports from technology giants Microsoft and Nokia. Taking comfort from these companies' better than expected results and bullish revenue forecasts, Nasdaq rose by nearly 8 per cent. This was the third-largest rise to date in the Index in percentage terms.
Last week's events are just the most recent example of what has been happening on international stock markets throughout the year. In the early months of the year the so-called new technology stocks, mainly shares in technology, media and telecoms(TMT) companies, moved ahead swiftly.
In March the market reassessed its TMT focus and these shares fell sharply as solid old economy profit-generating stocks came back into favour. Later in the year as the markets started to separate the TMT stocks between potential winners and losers, a tentative recovery started.
In September TMT stocks started to slide again. At the same time some of the old economy shares, which had lost out heavily to the new economy companies, showed some recovery. In the Irish market, shares in AIB, Bank of Ireland and Irish Life all outperformed their European peer group, having previously underperformed.
The September sell-off of new economy shares was sparked when computer chip manufacturer Intel produced cautious sales forecasts. This was followed by profit or revenue warnings from other technology companies. At the same time there have been better than expected results and bullish forecasts from other technology companies. The bottom line is that markets are confused. There are mixed signals around. In periods of intense market volatility both the opportunities and the risks for investors increase. But investing is very like gambling. To shorten the odds in your favour you need to try to understand what influences the market and the performance of different sectors and stocks.
There are a number of good reasons why investors have become increasingly nervous about share prices. There are concerns that inflation in the US may be on the rise. The surge in oil prices is expected to depress corporate earnings - historically the last three dramatic rises in oil prices have been followed by recessions in the US. Some recent banking results have caused concern about credit quality.
Investors in the TMT stocks are concerned that companies will not be able to maintain strong revenue growth while investors in telecoms stocks are concerned about the high cost of the new third-generation licences and technology. What drives new economy shares is harder to understand. Generally, these companies operate against a background of rapidly changing technology. Many have not yet produced profits, face continuing high development costs and it will be some time before their earning power will crystallise.
In a volatile and fast-moving sector it will be very difficult for individual investors to identify potential winners and losers. For this reason investors would be well advised to consider buying into TMT shares through specialised technology-focused managed funds. In this way they will get a spread of shares as well as the services of experienced investment managers.
But, as with any investment, investors should look carefully at the charges involved and at the track record of the fund managers before they part with any cash.
