The New Economy: spotting the serious value behind the surfing fads
With the pace of change in the global economy faster than a Parliamentarian's path to Bellamy's at dinnertime, staying on the sidelines looks increasingly riskier than getting into the game.
Tuesday, May 23rd 2000, 12:00AM
Hear the hype: "The new economy does not replace the old-it transforms it into something unrecognisably different. Along the way, it is creating - and destroying-value at a faster rate than any time in history".
Statements like these are just part of the ballyhoo surrounding the emergence of what is being called the "information", the "networked" or the "new" economy.
A while back some sceptics pointed out that the exponential growth of some information-based companies was not a proper basis for, in effect, concluding that the US stockmarket was an engine whose accelerative power was unlimited.
That, however, is to unfairly lump the starry-eyed with the more sober observers, who have spotted a genuine sea change not only in the way many companies do business but also (and perhaps more importantly for investors) how they think and feel about it.
Soaring on sentiment, American markets have spiralled and slumped in recentyears - but the trend line still points to the sky.
Even with the "dot.bust" of the last few weeks and months, the markets have shown remarkable performance, creating a "wealth effect" which has rubbed off on ordinary Americans and helped sustain economies around the world, including our own.
So what do investors need to know about the "new economy"? Do new economy stocks belong in a balanced portfolio?
Here's how Wired® magazine's "Encyclopaedia of the New Economy" defines what's going on:
"When we talk about the new economy, we're talking about a world in which people work with their brains instead of their hands. A world in which communications technology creates global competition-not just for running shoes and laptop computers, but also for bank loans and other services that can't be packed into a crate and shipped. A world in which innovation is more important than mass production. A world in which investment buys new concepts or the means to create them, rather than new machines. A world in which rapid change is a constant."
In this new economy, the assets are seen as minds rather than machines.
Does that mean investors need worry about whether companies riding the wave of revolution are based more on pipedreams than production?
In some cases, perhaps they do. But in others, the concern need not arise.
Take some of the 40 "new economy" stocks in the Wired® Index Trust recently launched here by Investec Guinness Flight through Public Trust.
American Airlines (AMR) has huge physical infrastructure - yet it makes more money moving electronic bits around the world than it does moving people. The company's 80 per cent stake in the SABRE electronic reservations system makes more on capital and is growing faster than the traditional airlines business.
FDX Corp - better known as FedEx-has been described as "the delivery boy for the new economy". By linking electronically to its customers, FedEx gives even small companies global capabilities. Leading electronic retailers such as Amazon.com and Dell Direct rely on FedEx for the logistics to make their businesses successful.
Those are familiar names - but here's one you may not know: JDS Uniphase Corporation. As the telecommunications and cable TV industries expand, they need fibre optic communications components and modules. JDS Uniphase is the leading supplier, able to exploit the explosion in data traffic and market growth driven by deregulation.
None of these companies necessarily spring to mind promptly when one thinks about the new economy, yet all of them are mining its potential to grow their business.
These are the sorts of companies-the ones whose name is not in lights as leading the dot.com charge, but who know how to surf the wave of change-that commend themselves to the more thoughtful investor.
Those who follow electronic retailing and "e-business" know well that Amazon.com, recognised as the leading online bookseller (and vendor of a broadening range of other merchandise) is not yet profitable. FedEx, for example, has been profitable for decades.
QED: there's the lesson - not that one should ignore the dot.coms - one of the biggest, America Online, is swallowing TimeWarner, after all-but that those who are sharp enough to quickly assess the environment and adapt deserve investors' confidence. As always, the heady seesaws of the markets should not blind one to the need to follow a long-term investment strategy.
Research is often not easy at New Zealand's remove from the still superheated markets of America, hence the arrival of funds such as Wired® Index Trust that have put in the homework needed to peek behind the hype.
Trawling through the World Wide Web using search engines such as google.com (winner this month of a "Webby Award") is one way of building a picture.
But with the Dow described as dated and the pace of change faster than a Parliamentarian's path to Bellamy's at dinnertime, staying on the sidelines looks increasingly riskier than getting in the game.
Chris Galloway is the corporate communications manager for the Public Trust Office
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