INDUSTRY VIEWPOINT - Snubbed by the smarter investor

Jyoti Banerjee, managing director of Tate Bramald Consulting, gives his opinion on the possible ramifications of the stock market turmoil.

When the FTSE information technology index started at the beginning of this year, many people felt the stocks were overvalued. With the recent turmoil in the markets, a price adjustment had to take place. And we can see that happening now. Of course, it is also a reflection of what has been happening in the stock market in general. But the performance of businesses in the IT sector has certainly not been increasing along with respective share prices.

In the US, IT is seen as a kind of 'darling stock'. It is hot property.

And indeed, traditionally it has not failed to deliver the expected results.

You have only to look at Microsoft's margins to see what a good deal the US IT sector is for investors. Or was. Its appeal and growth rates were incredible. But this also means that these companies have a long way to fall.

As we all know, the most successful IT companies are not British and in the US, the performance of UK IT companies has been slack compared with that of US companies. One company boss recently told me that the big disadvantage the UK faces is that it has fewer large businesses than there are in the state of New York alone. There is nearly always a bigger market player to compete with any UK IT company.

The daily media headlines show US stock has taken a hit and many shares have taken a dive. The entire market is down. And the perception is that technology is one of the most affected areas. Confidence has been dented, especially by the situation in Japan. But because UK stocks were not doing so well before, less damage has been done. There has not been a great difference in UK stocks.

Not all technology shares are suffering. For companies like Yahoo, results are way above expectations. But the market is not interested in investing in these stocks. Its view of technology stocks has been damaged.

So, are there any bright spots? The UK has a number of companies in areas which look promising - including call centres and customer relationship management. These may number only about 100 companies, all relatively small. As these markets grow, the companies will mature and enter the stock market. But again, they will have to compete with US companies.

In my opinion, the consultancy business has more chance of pulling through.

Any business that is adding value, rather than selling boxes, will have a better chance of survival. If long-term contracts are in place, companies can take hits in certain areas, but will usually pull through on the strength of others.

So will investors remain cautious over the next couple of years? I think the answer is yes - and not only in IT. We are going to see people losing confidence and holding back on investment. Confidence is everything and it is taking a beating worldwide.

Of course, resellers will be affected and will need to think hard about growth prospects over the next couple of years. There are difficult times ahead. Issues like the year 2000 and the euro will not be top priorities for customers.

But the biggest battle facing UK companies is not the stock market. More important is how businesses are affected by investment. Technology is seen as risky - and therefore we will see people investing a little less in this area over the next couple of years. It seems likely that we are heading for a recession and the UK technology sector will grow at a slower rate.