Nostradamus, the Book of Revelations, doomsday cults, all have something to say about the approaching millennium. So what can we expect - rational, sensible behavior or Apocalypse Now?
ITWeb recently ran a Reuters story stating that the JSE IT sector is coming under pressure due to millennium fears. Not quite convinced, we asked some of the industry`s top analysts how they see the Y2K problem affecting the market, if at all.
Victor Hugo, Analyst - The market doesn`t like uncertainty. Y2K is a problem precisely because the scale of the problem is unknown. It is impossible to measure the potential for disruption to infrastructure and systems.
There is even debate whether there will be major impact to the markets. Yet there is now more and more well researched evidence becoming available that transport, banking and communication systems will be interrupted worldwide - and this will have a negative impact on the ability of most companies, not only IT companies, to perform.
The scale of the recession likely to follow is also being debated. Estimates range from two years to three months and once recession prospects are appreciated, IT share prices dependant on a buoyant world economy could retreat quite steeply.
So IT investors who have had a magnificent run for a few years are anxious to protect profits in a sector which in any event is arguably overbought. Investors want plenty of cash available to buy their favourite IT stocks at lower prices - many are hoping that the best buying time will be February 2000 for real profits to come from the recovery. There is still time to increase cash, as this is also a way of managing an immeasurable risk.
Gordon Taylor, Merrill Lynch - The Y2K scare will see investors acting cautiously towards the IT sector, however, the fact that there is general wariness in the market as a whole at the moment cannot be overlooked. "The more volatility the less rationality" is the general rule in trading, and the IT sector is expected to become more volatile as the millennium approaches.
The sector should have regained favour by the end of the second quarter 2000, as fears are allayed and catch-up investments materialise.
Morgan Grenfell - There are two aspects. Firstly, there is a real risk that extensive non-compliance could lead to a severe knock-on effect in the economy. If non-compliant enterprises are unable to go about their business as usual and the supply of product and services is disrupted, this would also impact negatively on the businesses of compliant customers and suppliers. Dr Ed Yardeni, economist at Deutsche Bank in the US, ascribes a 70% probability to this Y2K effect triggering a first quarter recession in the US. This would have a short-term negative impact on stock markets around the world.
There is also the threat of irrational investor behaviour in the run up to Y2K, fuelled by the software bug and the apocalyptic stories that are likely to emerge as the deadline nears. Many investors may prefer to be in cash over this period, "just in case".
IT stocks, as the culprits of the millennium bug, could feel the wrath even more. There is the obvious threat of litigation, and software companies are likely to be most vulnerable in this respect.
There is also a fear that IT spend will slow down in the third and fourth quarter as IT departments batten down the hatches. The question then is: where will the spending pick up in 2000? This prompts a further question: how much of the big IT spend seen in recent years was in fact related to becoming Y2K compliant? If we`ve had a bubble IT economy in recent years, and spending will return to more sedate levels post-Y2K, then perhaps current valuations are no longer justified.
In our opinion, we do expect a drop in IT spending over the next six to nine months, but new technology spend is driven in the main by the advance of the digital/information economy. This trend is not going to go away. The spending emphasis may change, with less focus on enterprise software and more on applications and front-end systems but we doubt that IT budgets as a whole will be smaller in the new millennium. We would view excessive price weakness as a good buying opportunity.
Patrick Lawlor- E-Data director and ITWeb columnist
All sorts of different things are affecting the SA economy at the moment. One is a falling interest rate environment, coupled with a fairly stable rand, which should aid economic recovery. But the overall JSE has not reflected this positive outlook as well as it might, and that might be precisely because of the Y2K issue.
The Y2K issue means you can throw all forms of rationality out of the window. Shares are likely to do strange things right into the first quarter of next year, as rumours start, get fulfilled or dispelled.
What might happen is some sort of hoarding effect, both locally and globally. Whenever there is worry about a future event, people, both individually and as companies or countries, hoard things they know they can feel and which will they can use "when the lights go out". So commodity prices should rise, as people stockpile metals, foodstuffs, materials and fuels. Commodity shares (Iscor, Sasol, Sappi, Billiton) should also do well (exclude gold from this argument - it has a dynamic all of its own!).
Apart from the issues surrounding the IT industry, this hoarding mentality might be behind some of the moves out of IT: investors are seeing commodity shares as a better bet in these times rather than IT. Also, with the economy likely to recover soon, it may make more sense to buy into shares that are likely to score quickly out of the recovery (such as retailers or, later, construction companies) than in IT shares.
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