NO. 3 ∙ March 2020

MARKET COMMENTARY

“New economy” – 20 years on and a look at what’s happening today.

AUTHOR: Harald Berres

Senior Portfolio Manager



March 2020 marks 20 years since the end of the world’s biggest wave of speculation in “new economy” businesses. What happened? Two new technologies, whose success stories had started in the early 1990s, set about transforming the world. The mobile phone and internet age had begun. In the mid-1990s, a large number of European telecommunications companies in state ownership went public with substantial offerings. In Germany, the successful IPO of Deutsche Telekom and the subsequent share price gains sent investors into raptures. The myth of the so-called people’s share came into being and investors bought anything and everything that came on the market. In the frenzy of speculation, and to sate investors’ appetite for shares, the telecommunications companies placed more and more shares on the market. This gave countries in Europe a welcome opportunity to sell off the family silver. A similar process had taken place in the U.S. at the beginning of the 1980s. AT&T, which had become a monopoly, was broken up into a number of regional providers of telephone services, giving rise to the so-called Baby Bells (Bell South, Bell Labs etc.). However, U.S. speculation at the beginning of the 1980s was restrained compared with what went on in Europe in the 1990s. The Baby Bells were again at the centre of incredible speculation at the end of the 1990s; but more about that later.

On the heels of telecommunications, a second, revolutionary technology slowly but surely conquered the market: the internet. Drawn by high valuations and soaring prices, more and more dotcoms took the IPO plunge. Though slow to start, by the end of the 1990s it had totally eclipsed even the telecommunications speculation and had swept up sectors that were only indirectly connected with the internet. Thus began the unstoppable rise of TMT shares (telecoms, media and technology). The companies of the “old economy” prepared for the new age by investing heavily in software and infrastructure. The first websites were created and online stores opened their doors to curious customers who wanted to experience the new way of shopping first-hand and online. It was at the time that internet pioneers such as eBay and Amazon took their first tentative steps. Amazon was initially exclusively a book seller and eBay focused on online auctions. The search-engine business, on which Google has a firm grip today, was dominated by Yahoo at that time. There was major investment in internet and technology shares worldwide, albeit in a different order of magnitude in a technophile U.S. In Japan, two investment companies caused a furore. Jafco and Softbank made their investors rich in a matter of months. Jafco surged by a whopping 1,000% in 1999 before disappearing into insignificance. Softbank managed to surpass that, rising by more than 1,300% in just one year. Unlike Jafco, Softbank still plays a key role in financing tech start-ups today. Softbank has a significant stake in the Chinese internet giant Alibaba and in Uber Technologies, among others. The Japanese internet pioneer also operates in Germany, for example, with a shareholding in Munich-based FinTech company Wirecard via a convertible bond. Softbank has been financially very successful in the past 10 years. However, the share price never managed to live up to the successes of the 1990s and today is still well below its level at the beginning of 2000.

Figure 1: Softbank share price 1998–present

The “Neuer Markt” was set up as Germany’s answer to the Nasdaq in the U.S.: a segment for financing young, innovative companies. The newest German stock exchange index at the time, it skyrocketed as soon as it launched at the beginning of 1997. The first new issues – just like what happened in the U.S. – were many times oversubscribed, and share price gains were regarded as a certainty. Even jumps of 100% on the first day were a possibility. It’s true that IPOs in the U.S. at the time were on a different scale, but at least Germany now had its own Wall Street, albeit somewhat smaller. The first bright lights of the “Neuer Markt” were Mobilcom, Singulus and LHS Group. The share prices of these companies soared and made overnight millionaires of their major shareholders. Attracted by the successes, more and more companies strove to obtain a listing on the “Neuer Markt”. A large number of new issues followed and the success of the “Neuer Markt” eclipsed all other indices, such as the MDax and the SDax. For investment banks, this was a very profitable time and technology fund managers were treated like popstars. Even the number of Porsche registrations and sales of other luxury goods shot up as the new economy created fresh millionaires. The stock market boom was in full swing. Not even the Asian financial crisis in Autumn 1998, which caused a temporary fall of 40% in the Dax, could hold back the “Neuer Markt”. From the end of 1999 until March 2000, the world of finance finally let loose. The stock market was all about TMT and nothing else. The “old economy” business activities, such as automotive, energy and industry, were sidelined. Although the indices continued to break records, most “old economy” stocks lost value. The indices only got a boost from the technology and telecommunications sectors, as well as from audacious takeovers such as Vodafone’s takeover of Mannesmann. Thus fate ran its inevitable course.

What began as a smart idea to finance young companies ultimately led to a gigantic bubble of speculation, which ended with a loud bang: news of the first scandals broke in March 2000. It transpired that many business models were unsound and could never have been profitable. Some companies turned out to be shady, their balance sheets weak, run by managers who were often out to line their pockets. The decline of the technology scene began.

As ever, the scandals in the U.S. were on a different scale than those in Europe. Multinationals such as WorldCom and Lucent Technologies were taken to court for alleged balance sheet misrepresentation, and their share prices plummeted. Both WorldCom and Lucent were two of the Baby Bells that were a product of the breakup of AT&T in the 1980s and had been among the high-achievers of the sector for years. Lawsuits against these icons of the U.S. economy rattled the whole sector. The party was finally over. Both the Nasdaq and the “Neuer Markt” plummeted. The subsequent downtrend in the stock markets, with many bankruptcies and further scandals, did not end for three years.

Figure 2: Rise and fall of the “Neuer Markt” 1998–2003

What about today? Many parallels can certainly be drawn between then and now. The economic cycle is at an advanced stage and is being shored up by exceptionally low interest rates and tax cuts in the U.S. Similarly, national debt is a multiple of what it was in 1999. The high level of debt has financially paralysed some countries (such as Greece), and without assistance from central banks other countries (such as Italy) would be caught in this same debt trap. Many companies have also greatly increased their debt ratio, and bought back shares on credit. In addition, their balance sheets in many cases consist of intangible assets. The fact that the supply of liquidity from central banks is slowly drying up and that interest rates have the potential to rise poses an additional risk with unforeseeable consequences for borrowers. The resulting investment crisis could, however, cause stock markets to heat up further, and current valuations allow for further price rises.

Aside from these current risks, however, it must be said that the starting situation today is completely different. On closer inspection, comparisons with 1999 don’t hold up at all. Firstly, the major indices in Europe and the U.S. are exhibiting no extreme valuations; after the latest correction at the end of February they are in or around the historical average. So, we have some way to go before we get to the valuation levels of 1999. Secondly, there may be some worrying speculation in some equities but overall it is too insignificant to cause pronounced fluctuations in the stock markets. Moreover, those companies do not have the economic clout that multinationals like WorldCom, Lucent and Enron did in 2000. So, what we have here is isolated, regional, sectoral phenomena. Furthermore, there are only a few new issues in Europe, and mass oversubscriptions are the absolute exception whereas in 1999 hardly a day went by without a new TMT issue whose IPO was being following with great interest. Besides, today’s indices have a much greater market breadth whereas in 1999 only a few equities with a very substantial index weight were the driving force behind the stock markets. While the present measures to contain coronavirus pose economic risks, excessive speculation similar to the dotcom bubble can be ruled out at the moment. There should therefore be further potential for the bull run on stock markets that has lasted for more than ten years – driven mostly by technology shares.

Authors

The Portfolio Management Team

L’équipe de gestion ETHENEA

Standing (from left to right) : Jörg Held, Dr. Volker Schmidt, Frank Borchers, Christian Schmitt, Ralf Müller, Michael Blümke, Niels Slikker
Sitting (from left to right) : Arnoldo Valsangiacomo, Harald Berres, Luca Pesarini, Martin Dreier

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