The US Federal Reserve's recent decision to reduce short-term interest rates by a half-percentage point has now brought the cumulative 2001 decline in US short-term interest rates to 2.5 per cent. Of equal importance to the actual cut in interest rates was the accompanying statement that the bias of monetary policy remains towards further easing. In layman's terms this means that further cuts in interest rates are likely in coming months.
Investor sentiment had been improving markedly up to the Fed's move and, in general, share prices have continued to improve since this latest reduction in rates. Although the economic signals continue to be mixed, the benign view that the US economy will achieve a soft landing seems to have the upper hand.
Furthermore, the cut in euro interest rates of one-quarter of a percentage point seems to have signalled a significant change in stance by the European Central Bank (ECB). Recent economic data, in particular from Germany, pointed to worrying evidence that the European economy might also be sliding into reverse.
However, investors in stock markets would seem to have been heartened by the ECB's move and this has generated confidence in the ability of the euro zone to continue to grow at its trend rate of growth. The Irish equity market has been a prime beneficiary of this more positive environment and has reached a new all-time high in the past week. However, this has not been the case for the handful of Irish-quoted technology stocks. The woes affecting Baltimore Technologies have now been well documented and the shares have fallen by more than 80 per cent so far this year. The glory days when the company was promoted to membership of the elite FTSE 100 index now belong to another age. The company has continued to generate substantial losses and the recently-announced cost-cutting programme has left the market somewhat sceptical regarding the company's long-term prospects. Baltimore now finds itself in a desperate race to achieve break-even before its still relatively healthy cash pile runs dry.
On the other hand, Iona Technologies is profitable and is generating cash. Although the company is not immune to the slowdown in IT spending it has a strong position in the middleware market and has a healthy balance sheet.
Horizon's share price has halved recently due to a profits warning, and highlights yet again the high level of risk associated with investing in the technology sector. Declining profit margins rather than falling sales were at the root of the recent profits warning. As long as the management can reduce costs then the company seems well positioned to trade its way out of its current difficulties.
The undoubted star of the Irish technology sector in 2001 is Riverdeep, which provides Internet and CD-Rom educational material for the US school system. The company is still some distance away from generating profits, but it has already achieved a strong foothold in what is an enormous growth market. The ability of Riverdeep's share price to perform in a difficult market emphasises that investors are now much more discriminating when it comes to technology-investing. Fundamental analysis of a company's prospects has replaced the frenzy for technology investing that characterised the sector prior to the bursting of the technology bubble beginning in March last year.
Good stock selection has always been the key to successful stock market investment and in this regard investing in technology involves applying the same evaluation techniques as are applied to all companies.
In tandem with the global technology sector the Irish technology sector is suffering from the hangover associated with the excessive valuations of early last year. Nevertheless, it would be wrong to write off the sector and it is evident that it still offers attractive investment opportunities. However, recent volatility emphasises that the market is now taking into account the undoubted high levels of risk associated with these companies.
