Tech wreck won’t bring down US economy

The stock market savaging of the technology stocks is far from over, however, the US economy will avoid recession as long as consumer spending continues at the same rate.

Perennial Investment Partners co-head of global equities Scott King says the Bush tax cuts are funding this spending to record levels. In the third quarter of this year, the tax cuts will account for 2.4 per cent of consumer spending. In hard numbers the tax cut is $US42 billion.

“Consumers are also refinancing their houses and being allowed to take equity out which is being spent immediately,” he says.

The boom in consumer spending has seen many US fund mangers chasing consumer-orientated stocks on the belief that there is good growth, King says.

“The momentum investors are now driving up retail stocks as they pull out of tech stocks,” he says.

“But is it now time to revisit tech stocks with these guys pulling out?”

King argues the fallout from the tech bubble is still not over and high-tech companies are facing tough times.

The spending on personal computers and mobile phones has reached saturation point and this will send some tech companies in downward spirals. Estimates for sales growth in the US technology sector will fall to 6 per cent this year from 20 per cent in 2000.

“The killer application was band-width, but the take-up is happening a lot slower than predicted,” he says.

Another problem looming in US tech stocks is the granting of options. Tech stocks accounted for 65 per cent of the value of options granted to staff by companies in 2000.

King says if these options, which are being offered instead of wages and as loyalty incentives, were scrapped, the S&P 500 earnings growth since 1995 would have been cut from 9 per cent to 6 per cent.

Perennial’s 20 percent return in global equities has been gained by avoiding areas such as tech stocks that were overpriced by the momentum investors, says King.

Its performance to July 31 is 7.7 per cent compared to the index which lost 3.5 per cent. Perennial now has $2.5 billion of funds under management with retail investors accessing the global funds through IOOF’s Flexi master trust.