NEW YORK-As 1999 drew to a close, two mutual fund managers, one overseeing a diverse investment portfolio, the other specializing in telecommunications, offered contrasting views of the year-2000 stock market outlook.
Peter M. Donovan, president of Wright Investors’ Service Inc., Bridgeport, Conn., sees the big picture this way. Investors fixated exclusively on the technology wunderkinds that have propelled stock prices at the end of the 20th Century must broaden their focus if the overall bull market is to continue rushing forward into the new millennium.
“A pullback by (American) technology and telecommunications stocks would be for the best, relieving pressure on the overvalued market,” he said in his presentation at a New York Society of Security Analysts meeting.
“There are really two markets-institutional investors and speculators. [The latter] have driven the market to unbelievable heights. Momentum is an unbelievable force, but investors need to take their eyes off the rear-view mirror.”
To J. Michael Gallipo, portfolio manager of the Monument Telecommunications Fund, Bethesda, Md., the Internet has only begun to shape a rosy future, especially for carriers and the equipment manufacturers that supply those carriers.
“We are strong believers in the new economy. One of the most exciting sectors, which will drive Y2K growth, is increasing bandwidth, more ubiquitous communications and declining prices,” he said at a media briefing on year-2000 trends in telecommunications.
“It’s an exciting time to be both a consumer and an investor. Telecommunications will be the leader of the economy for the next decade.”
Technology stocks have outperformed broader markets in 14 of the last 16 quarters, reaching a crescendo in 1999 as “Nasdaq blasted off,” Wright’s Donovan said. The question for investors is whether an encore performance is possible, given the stellar performance of the recent past.
“There will be a closing of the gap between the companies that really make money and these high flyers, but I don’t think there will be a prolonged bear market. The best possible alternative will be a rotation into lower-valued stocks,” he said.
While not at all opposed to investments in domestic high technology companies, Wright recommended portfolio diversification into European and Asian stocks in a variety of industry sectors and into domestic companies involved in consumer products, financial services and energy.
“The Industrial Revolution took decades. The technology revolution happened in 1999,” Donovan said.
“The (resulting) excess of economic growth has been accompanied by an excess of hand wringing over whether we are growing too fast. The exuberance has been entirely rational.”
Gallipo said his exuberance is guided by the observation that the burgeoning Internet-related sector is totally dependent on access and transmission. In fact, the fund he manages voted with its dollars in October by switching from an Internet investment portfolio to one specializing in telecommunications-related companies.
“Communications anywhere, anytime means wireless Internet access,” he said.
“The clearest winners are handset manufacturers and component makers. Wireless carriers also should benefit.”
Noting that a cellular telephone’s average lifespan is 18 months and that the number of mobile wireless customers is increasing dramatically, Gallipo said he likes companies like Nokia Corp. and Motorola Inc.
“There still are a lot of questions about what will be the dominant device (for Internet access),” Gallipo added.
“Obviously, cell phones are common, but they have some inherent limitations. One way this could evolve, especially with Bluetooth, is to allow the cell phone to become more like a wireless modem.”
The efforts of Ericsson Inc. in this regard are noteworthy, he added.
With respect to carriers, AT&T Corp. is on the top 10 list of Monument Telecommunications’ investments. The fund does not own Sprint Corp. stock because takeover rumors caused a run-up in share price that made the cost too dear, Gallipo said.
As an investment portfolio manager, Gallipo said he generally approves of tracking stocks, like those Sprint has offered and AT&T has proposed for their wireless telephony units. More carriers, including SBC Communications Inc., seem likely to debut them because tracking stocks unlock the value of newer, higher-growth businesses within the larger company.
“We’re more in the thumbs-up camp, but not 100 percent there. The only real down side from an investor point of view is that it’s not clear what you own,” he said.
“The parent company exerts control over the subsidiary and doesn’t have to act in its best interest, although you’d hope it does. That really only comes into play if something goes terribly wrong, and there’s nothing in the wireless world that leads you to believe it would.”
The Monument Telecommunications Fund also has taken into account that the demand for ubiquitous access to the Internet and other kinds of data is not occurring exclusively in the domain of mobile communications. High-frequency microwave technologies for fixed wireless access also are poised for strong growth.
Carriers like Teligent Inc. already are up and running, while those like MCI WorldCom Inc. and Sprint have bought into wireless cable. Vendors, including but not limited to Cisco Systems Inc., are gearing up through acquisitions to supply this growth sector.
“There are now Internet-enabled gas pumps, good for men afraid to ask directions. Walmart is getting into the gas business and into e-mail orders for food that customers pick up the next day,” Gallipo said.
“All of this most likely will be done wirelessly.”
It seems hard to believe today that, as recently as 1997 and 1998, a global economic crisis was unfolding, one which President Bill Clinton termed the worst in 50 years, Donovan of Wright Investors’ Service said. Technological innovation, healthy competition and low inflation in the United States not only allowed it to sidestep other countries’ problems but also to become an engine of worldwide economic growth.
Amid that turmoil, investors shrugged off the 50-percent decline in technology stocks that occurred in 1998. More recently, Internet stocks have rebounded from the 50-percent decline they experienced between April and August 1999, Donovan said.
Nevertheless, he cautioned against the perils of today’s two-tiered market of institutional and individual investors. Conditions are similar to those in the 1960s when there were more individuals holding stocks than ever before. A shakeout ensued in the 1970s.
“Day traders and other speculators pose a serious threat. There is a huge risk we could get a cascading effect,” he said.
“If you put most of your stocks in reasonably priced companies, you could get hurt but not killed … We don’t expect a continuum of 20-percent returns (on investment) going forward.”
Nevertheless, the new technology-based economy propelled the United States into its 105th consecutive month of expansion in December. If this continues into early 2000, the domestic economy will set a record for the longest expansion. Wright Investors’ Service expects that to continue well into 2001, but with some slowing apparent.
“Asia remains an enigma, better than expected in many countries, stubbornly slow in Japan. There is growth in Europe,” Donovan said.
“(Corporate) profits in Europe and the United States will be about the same in 2000, but Japan will lag again.”
