The Anglo File: Investors Beware False Dawns for Technology Shares - TheStreet

LONDON -- A strong performance by

Nasdaq Composite

on Tuesday raised U.K. tech stocks on Wednesday and the hopes of investors in such shares that the good times are here again. Alas, sector watchers say there are still no real grounds for optimism and the situation in U.K. tech stocks is likely to get worse before it gets better.


Techmark 100

finished almost 4% higher on Wednesday at 3256.3 points, and with the index still 43% off its March 6 peak, the bulls argue that this represents the start of something beautiful. Trouble is, there is a deafening roar to the contrary from the bears, who say there is more pain to come.

Sector-watchers reckon the Nasdaq will, at best, track sideways, but will most likely fall further on fears of higher interest rates. That, in turn, would force the Techmark lower. They point out that, while it is true the Techmark is well off its peak, it is still 60% up from its launch last November and is likely to register further losses.

The consensus in the market seems to be that short-term rallies among tech stocks, like that seen Wednesday, are an opportunity to sell and not a sign that the sector is starting to pick up again. More pain is predicted and the sector is not expected to show serious signs of life until the fall.

At the end of last week, the


technology team -- among the loudest bears out there -- warned of further misery to come in the sector.

"After a massive fall over the last six weeks, the sector has now just reached the forward PER

price/earnings ratios relatives that it achieved at the peak of the 1998 boom. In 1998, the sector fell from a PER relative peak of 2.5 times to 1.5 times. We expect the sector to fall to around two times the


350 PER, down another 15%-20% from here," Nomura said in the report.

This view is shared by Richard Holway, an independent IT analyst, who says in his annual report that prices "are still historically too high and have further to fall -- particularly bearing in mind the forecasts for profits growth."

Nick Glydon, a chartist at

Robert Fleming Securities

, says his best guesstimate is that the current downward trend in the sector will continue until around September, with perhaps a rally in June. He speculates that the Techmark could pick up to around the 3500-4000 level by the end of June, but then drop to as low as 2000 in September and then pick back up to around 3200 by the end of the year -- more or less to where it is today.

One trader, who declined to be named, is also predicting gloom, suggesting that the Nasdaq could go as low as 2800-3000 points -- a further 20% loss from today's levels -- and in turn the Techmark would head lower by another 20-25% from current levels.

Such pessimism was also evident at the

Credit Suisse First Boston

annual technology conference in Barcelona last month. Participants at the conference reason that U.K. tech stocks are due for further weakness because technology shares are cheaper in other regions, notably in the U.S., and that prices are falling even there.

As such, many argue that the short-lived rallies in the sector, like those seen over the past couple of days, look more like opportunities to cut positions rather than to buy into the weakness. If cash is indeed king for the time being, then it may be some time before investors in U.K. tech stocks hear the words, "Let the good times roll."