Technically Speaking: New economy will survive its setbacks and by fits and starts

Friday 28th April 2000

The information age technological revolution has been likened in its significance and prospective generational length to the Industrial Revolution of the 19th century.

Some of contemporary technology's likely longer-term influences, such as changes in geopolitical power structures, are yet to be played out.

The US is furthest down the track in colonising cyberspace but the power struggle between nation states competing for their own slices of virtual territory has only just begun.

In Fighting Free Radicals: The Enzogenol Story (edited by Kelvin Duncan), there is an intriguing historical section that deals with a precursor to the present shift from an industrial basis to an information basis for state power.

The case involved the evolution of state military strength from pre-industrial to industrial age societies.

It was important earlier on for the military to own forests - to supply trees to build navies. That emphasis changed to control over metal and fossils as the military moved to steel ships.

According to the book, forest assets have never recovered economically from losing their military value.

Advances in military technology dictated this transference and with it came commercial value as European countries switched from wooden sailing ship to steel steamship navies.

The effects were particularly obvious during colonialist eras. Contrast the patterns of 19th and 20th century colonialism.

In the 19th century in a form of commercial colonialism New Zealand was valued for its kauri trees which were perfect for masts and spars.

By contrast, 20th century Japanese steel-ship militaristic colonialism, defeated at the end of World War II, was distinctively different from preceding European power colonialism in that it had characteristic modern industrial era objectives from the outset and selectively invaded territories rich in mass-production raw materials.

The contemporary transition from the industrial era to the information age has been marked in military terms by the triumph of "smart" technology over traditional steel-based weaponry in war theatres such as Iraq and Serbia.

Today's dominating military powers are premised on mastery of information technology. Historically, the leading information age technological paradigm, the internet, owes its existence to its invention by the American military-industrial complex as a means of maintaining communications under conditions of nuclear attack.

As with forests and minerals, so too with the internet: where the military goes, value follows.

Has the tech-rich Nasdaq index, and with it the bomb-proofed internet age, been nuked?

The grand economic transition now under way is often denoted as the move from the old economy to the new economy.

New economy shares have exploded lately, with Microsoft detonated under US anti-trust laws and the Nasdaq gone kamikaze stunt flying.

Just as the Industrial Revolution had its setbacks along the way to eventual maturity, including lasting depressions, so too will the new economy run into periods of difficulty.

Yet few would doubt the new economy is here to stay, that it will change our lives irreversibly as its evolves or that new economy companies will make up most sharemarket listings in the near future.

Accordingly, anguish over Nasdaq gyrations has an unmistakable air of short-termism about it.

Many companies being dumped are likely to be the biggest capital gainers of the medium to longer term.

Microsoft's future should be charted in terms of what happened to the resulting "Baby Bells" when the anti-trust bomb was dropped on US telecommunications.

These "babies" are worth more as parts than their previous sum as a single company and have opened up more markets and investment opportunities arising from increased competition.

Microsoft's dismantlement is likely to achieve the same.

Many new economy firms will fall by the wayside but those that survive will probably flourish under Nietzsche's celebrated motivational dictum: "That which does not kill me makes me stronger."

When it comes to history repeating itself, it should be borne in mind that commodity stocks have long gone through much the same boom, bust and selective recovery cycles that new economy shares are experiencing right now.

Gold is a classic case. Every so often gold hysteria sets in, the spot price of the metal jumps and share values for gold-linked companies rocket.

Then gold falters, panic sets in and gold stocks dive into price free fall.

At a certain point, common sense prevails and investors start to distinguish between gold producers earning revenues and paying dividends and gold explorers losing money on scratching holes around the place.

Share prices begin to distinguish earners from spenders among gold stocks.

Whether gold goes up or down in price, no one thinks its future is completely wiped out as a store of value, whatever is going on with gold shares.

Another almost forgotten investment craze that hit New Zealand in the early 1990s was for forestry shares, driving up prices for these old economy stocks to giddy heights not seen since.

Yet forestry stays in business, albeit in a more subdued mode without get-rich-quick expectations.

The new economy will evolve in fits and starts and its associated shares will exaggerate its underlying trend, overshooting either way.

There are new economy shares in New Zealand that show the hallmarks of future recovery but with the imposition of more tempered expectations.

The charts show daily data with quarterly (65-day) averages for three such stocks. All are technically cheap in trading well below their averages and all have at least reasonable medium- to longer-term prospects.

1. Advantage Group

2. Sky Television

3. IT Capital

Advantage Group (chart 1) has fallen victim in part to its own tendency to talk up its share price. Companies that try to pump up their stock by exploiting connection and relativity with sectoral or foreign trends risk getting dumped hard on broader downturn.

Sky TV (chart 2) is, like Advantage, a company with an existent market and actual earnings. Sky could be a beneficiary of the move to wireless communications technology for households and businesses.

IT Capital (chart 3) is a truly interesting case. It is a diversified venture capital investor in the new economy, which promises payback to its investors not by way of dividends but rather in preferential access to eventual initial public offerings of its investments.

The chastening effect of the Nasdaq sell-off may make investors think twice about how big the pot of gold now is at the end of the new economy rainbow, but good quality new economy initial public offerings should surely still command a premium on listing.

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