THE QUARTERLY MARKET SECTORS TO WATCH

The First Quarter of 2000 Commentary - by L.K.S.* December 30th. 1999

Investing and other branches of Economics are much an Art as Science. After the Charts, graphs and other quantitative methods, the social half of Economics - The Human Behavior factor - generally has the final say! This bull market, although long and exciting, will not last forever. As such, an informed investor will be positioned better to withstand the coming economic downturn with the least exposure to losses. If you are a first time visitor to this column, we advice you to visit our archives section (link is below) to get a proper understanding of our methods.

UNITED STATES AND CANADA

THE INTERNET SECTOR

Our outlook in this sector is good, but cautious. We see a very bright future for the major portals like Yahoo!, AOL, Alta Vista, Go Network, Inktomi, MSN, EuroWeb, Excite@Home, Lycos, Looksmart, and Snap. The major gains in this sector might come from ethnic content portals like Quepasa! and Yupi. Most portals now have strategic alliances for content with other players (local or Global) in other to be much rounded. These portals are evolving as the Internet community evolves.

The Mega sites and Directories will also do well, thanks to the advent of hand-held systems. The Mega site that provides rich content and ease of navigation is positioned to enjoy tremendous growth. Mega sites and Directories are very suitable for this task because information is not buried (hopefully) under layers of unnecessary information. Secondly, the information on these sites is either proprietary information, or it is cleaned up for easy presentation and use. MarketWatch.Com, TheStreet.Com, and this site (of course) are an example of such.

Business to business (B to B) online retailing is now hot, and  will continue to be for awhile. B to B retailing is really the natural progression step of the web, especially since a good track record can be found in Electronic Data Interchange (EDI). The first ones out of the gates seem to be Ariba, Retek and Tegal corp. Expect more business to business web companies to increase and perform spectacularly.

This quarter will be rough on strictly online retailers. The unprecedented (and successful) challenge the brick and mortar stores gave their online counterparts can't simply be ignored. Companies like Amazon.Com, which hasn't shown a profit yet, will suffer. We expect the brick and mortar stores to expand their presence on the web by revamping their existing web sites, joining their online and fixed stores customer support services (something web businesses can't seem to get together), and using their enormous name and brand recognition to promote their web presence.

Internet holding companies like CMGI, Internet Capital Group, and Venture Catalyst will be some of the hottest items this year. There are enormous internet holding companies out there that have valuable holdings from general portals to e-commerce solutions.

 INSTANT MESSAGING

New and young companies are going to flourish in this sector should they have a way for customers to communicate across the myriads of standards (see below). The established instant messaging companies can also reap great profits if they are willing enough to cooperate. This will be a niche market that has a very promising future.

The web is becoming a distinct community with every passing day. At the heart of this community is the ability to communicate in "real-time" time, the heart and soul of the web community, as it evolves through time. Real-Time communication attracts a lot of visitors (and revenues) to a web portal. Under this backdrop, America Online (AOL), the leader in instant messaging, has found a challenge from Microsoft Network (MSN), the up and coming unit of the software leviathan. There is also the PAL messaging standard, and others.

TELECOMMUNICATIONS & CABLE

 We expect this sector to be one of the Three hottest sectors in North America, if not the world. AT&T, Bell Atlantic, Bell South, MCI WorldCom, SBC Communications, Sprint Vodafone PLC,  and Qwest Communications will be stars to watch as they try to shape (and reshape) the Internet and telecommunications as a whole. The big advantage to these companies will be their ability to incorporate the cellular phone wireless technology with the Internet. The exciting thing about this sector is the experience these companies have in the Internet revolution. Most of the U.S. and Canadian Telecommunications companies stand to reap great profits as the Internet evolves in Europe, Asia, Latin America and Africa.

Online phone companies are going to be the major niche players in this sector. The major telephone companies are going to reply aggressively to the growing web based telephone companies like Net2phone.com by either buying these "smaller" players, or offer competitive services. 

Cable companies will not do badly either. We expect charter communications to acquire more units, and go into content alliances with online networks (could be MSN). We expect some strong performance from this sector.

WIRELESS CELL PHONES AND HAND HELD DEVICES

TECHNOLOGY

We are going to round up the usual suspects for this sector. Before we forget, Intel is going to do very well. Semiconductor and High speed Networking infrastructure manufacturers are going to be tough to beat this quarter. As the web evolves and need for higher speed increases, these companies stand to be in for quite a long haul. 3Com, Asante, Bay Networks, Cisco Systems, Texas Instruments, National Semiconductor, Lucent Technologies, Madge Networks, Novell Networks, Terra Networks, and Nortel Networks are just a few of those we feel have what it takes.

SERVERS AND STORAGE SPACE

Now that Y2K is behind us and online shopping for the 1999 Christmas season ending well better-than-anticipated, we expect the brick and mortar companies to expand their web presence and buy new equipments. Companies like Exabyte, EMC Corp, Iomega, IBM, Compaq, Sun Microsystems, Seagate Technologies, and Hewlett Packard stand to benefit the most.

MICROSOFT vs. LINUX

Not since the days of the great oil trusts has a company's trade tactics come under heavy fire. The legal problems of this software giant have further been aggravated by the comments of its leadership (knowingly or not). In the mist of this comes the Linux operating system into the market with the blockbuster IPO offerings and performance of Red Hat, Corel, Caldera, and VA Linux, all Linux software vendors. Despite these distractions, Microsoft will continue to dominate the software market, while Linux will continue to be a niche market. Why? because Microsoft anticipated a possible breakup and have been wisely shoring and diversifying its web units; Microsoft have name, product, and performance on its side; Remember, it is nearly impossible to tell someone something that what has always worked for them is not really the best. The Linux field is not focused, or consolidated enough to sum up a credible challenge against Microsoft. . Besides, one will not be surprised to see a Microsoft version of Linux (Visual Linux or Visual Linx++ have good rings to them)-after all, Linux is supposed to be an open system.

We need to also note that, other e-commerce, business and financial applications software companies also stand to benefit. Intuit, Centura Software, Oracle, PeopleSoft, and others will gain tremendously.

BIO-TECHNOLOGY AND PHARMACEUTICALS

Besides the Internet, technology and telecommunications sectors, the bio-technology and pharmaceuticals stand to record the most spectacular growth. Recent developments in the Genome and biosciences will see an array of new bio-engineered gene therapy methods and drugs. We see industry leaders like Amgen, Ariad Pharmaceuticals, Genome Therapy, Trega Biosciences, and ISIS Pharmaceuticals having a stellar year.

Pharmaceutical companies are going to have a prosperous year too. The recent takeover squabbles in the industry are an indication of how the major players are positioning themselves for the aging baby boomers. We expect the industry to get more approval for drugs designed to meet this very wealthy but aging generation. Industry leaders like Abbot Laboratories, AHP, Bristol-Myers Squibb, Eli Lilly, Johnson & Johnson, Merck & Co., Pfizer, Schering-Plough, and Warner-Lambert will either acquire the smaller players or merge with their counterparts.  

EUROPE

Our forecast for Europe will be more or less the same as last quarter's. European economies will perform strongly up to 2001. We are most especially optimistic about the Telecommunications, cable and wireless and financial services sectors. The key players in telecommunications will be the German, French, British, Italian and Spanish "National" telecommunications companies. We expect the Northern European players like Ericsson and Nokia to lead the way in new exciting hand-held internet access technologies. This is the year that Europe will be like 1998 Internet industry in the U.S.A. We are expecting a reasonable amount of web use increase, and the public offering of such companies. Perhaps, the surprising underdogs will be Spanish Internet ventures, as they move aggressively to meet the growing demand for Spanish web portals and content around the world.

Most European Telecommunications, cable and wireless companies are tied down either through an extensive government involvement, or are units of large old industrial concerns that don't seem to grasp the changing state of the information age. Companies who unshackle themselves and focus on taking advantage of this exceptional opportunity will be the ones to watch.

The European financial services industry is growing and changing. The number of Europeans getting into the investment market continues to grow at a very rapid rate, as few count less on the old established welfare state. We expect financial institutions to continue acquiring and merging across borders, offer more investment opportunities as their North American counterparts (and increase their global influence).

Despite a glowing economic future for Europe, the persistent labor problems and the willingness of most governments to give in to union demands is troubling. Recent union successes in Germany, France, and Italy, though they seem politically savvy in the short run, are clouding the bright future these economies and Europe in general have in the long run. We feel the recent problems of the Euro and the high unemployment rate (twice the rate of the USA) are signs to, and of the markets rejecting the region's lack of a clear focus for economic and labor reforms. This dynamic new economy is very unforgiving, and European leaders need to always be aware of that fact.  

ASIA

Asia, (including Japan) is actually going to do quite well. Regional powerhouses like Japan, South Korea, Singapore, Hong Kong, Taiwan, and Malaysia will lead the pack Telecommunications, Banking, Technology (especially Software & manufacturers) will do quite well.

Nippon Telephone & Telegraph will do very well as the world moves into handheld devices to access the web. Over the years, this company's cellular & wireless unit have been hard at work building a sophisticated network in Japan that is the model for the world. We expect this wireless unit to be spun off, and to expand its operations to other parts of Asia. Singaporean, Malaysian, and Hong Kong telecommunications companies are not sitting by and watching "DoCoMo" have all the fun either. Recent hostile moves between Singapore and Hong Kong telecoms are just the signs of things to come-acquisitions and mergers across boundaries.

India's software industry has had a spectacular run in the past few years, and we expect more to come. Companies like Infosys Technologies, and Satyam have opened the door for many Indian software companies to tap the rich North American capital markets.

Technology components manufacturers in the region are going to enjoy a very strong year. Cellular and wireless handheld device manufacturers, memory chip manufacturers are just a few in this category that will enjoy a boom as the Internet and flexible access demand around the world continue to increase.  

LATIN AMERICA

South American Deposit Receipts (ADRs) have been gaining on U.S. exchanges lately. We expect tremendous growth in the Telecommunications sector. South American telecommunications companies stand to dominate in the "New Economy" as the Internet evolves in South America. Unlike in the U.S. where the Internet and e-commerce developed independent of major telecommunications companies, these South American companies stand to use both the North American and European models (and they have) to position themselves as the major and most potent players in the region. These companies will become some of the most prized companies in months to come. Argentina, Brazil, Chile, and Mexico will be the stars for the region.  Mexico's energy sector will also enjoy a robust growth. 

Venezuela has what it takes, but the recent natural disasters will take up resources that would have otherwise been used to improve its infrastructures. Nevertheless, Venezuelan energy and telecommunications companies will perform better than any other sectors of the economy. 

As commodities prices continue to be depressed, most Latin American countries will not do well. The only exception to the rule here will be the oil producing countries of Mexico and Venezuela. Argentina and Brazil will be least affected because they produce multiple commodities, and least dependent on commodities exports as the only source of foreign exchange.

AFRICA AND MIDDLE EAST

The outlook for Africa and the Middle East looks brighter than the last quarter. African and Middle Eastern Oil producing states have had an unprecedented windfall in oil revenues lately. Our forecast indicates oil prices will generally move within the price band of $24 to $28 Dollars per barrel, at least until OPEC meets in Venezuela in March. This financial windfall will be used by these economies to revamp their dormant economies, after a decade of low Oil prices. We expect these countries to restructure their economies in two main Areas: Use this money to improve infrastructures, and update ailing public companies for privatization. The best deals in these countries will be in Telecommunications, Oil related and Banking sectors.

The commodities market has been hard hit lately. Most Sub-Saharan African countries rely wholly on one or two commodities as their only source of foreign exchange, and that has been devastating on these economies. Unfortunately, we can't see  a change in the foreseeable future. Apart from the Oil producing economies like Nigeria, Gabon, and Cameroon, the only other economies that stand to do well are South Africa, Botswana, Namibia, and Zimbabwe. South African software firms are making a good stride on the global scene. However, mining will continue to dominate the South African economy for a while. A note of Caution about South Africa: The high unemployment rate is something of a grave concern, especially in a country that is politically very unstable, and South Africa has the makings of a pressure cooker.

Israel has what it takes to do very well in the next few years. Expect technology, telecommunications, Software and Internet companies from Israel to become major players in the world.  

* Mr. L.K.S. (he requested anonymity) has a graduate degree in Economics from a highly respected Public University in Virginia, U.S.A. For the past Five years, he has held many posts. Notably: State Economist, Economic Consultant, and Research Economist for a Large Mid-western University. He now lives in California.

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