Internet’s ‘sunrise’ industries pierce through the falling gloom

Forgive me for staying with the same subject, but the fact that supermarkets are getting a drubbing for their price policies and other such domestic issues of the moment pale into insignificance beside what is happening to international financial markets. To discuss anything else at the moment is like asking Mrs Lincoln whether she enjoyed the show – it rather misses the point.

I asked last week what business should be looking for from international markets as we approach the millennium. As the global economic crisis deepens, we might profitably consider the pressing issue of making any money whatsoever over the next couple of years.

The picture, it has to be said, is hardly encouraging. The Nikkei index in Japan is now rated lower than at any time since 1986 and may have further to go.They say the worst is yet to come. The Asian contagion is developing into a plague – the International Monetary Fund claims that Indonesia’s economy will shrink by some 15 per cent this year, while South Korea’s will contract by seven per cent. These are not emerging markets anymore – they are disappearing ones.

The plague has spread to Latin America, where depressed commodity prices have slashed the currency prices of economies such as Brazil’s, which accounts for nearly half of the continent’s gross domestic product. In the First World, Federal Reserve chairman Alan Greenspan is obliged to make a quarter-point cut in interest rates to relieve some pressure, but indicates that he’s not of a mind to bale out international markets any further. Of course, he would say that – no point in driving inflation upwards by a declaration of forthcoming largesse – but he is also indicating that it’s time to dig in for a long economic winter.

All of which and more suggests that there isn’t money to be made, only money to be protected, so far as possible, from loss. Even the ‘new’ politics, under the banner of the Third Way, begins to look decrepit. The Economist tells us that governments of the major European economies – Britain, France and Germany – are now left wing for the first time since 1929. In terms of economic comfort, that’s like telling us that transatlantic liners have regained the standards of 1912.

But, actually, not quite. Let’s draw some comfort from the knowledge that those who are currently forecasting a return to an economic ice age are the very same prophets who, the other side of August, were telling us that there were perfectly plausible economic models to demonstrate the fundamental quality of Western economies. This is not an injunction to complacency – but the truth probably lies somewhere between never ending prosperity and utter economic annihilation.

In general, those looking to finance management buyouts – and those participating in them – ought to be facing an encouraging market. Venture capitalists and those running leveraged buyout funds ought to be sitting on cash that should be seeking the under-valued, or downright cheap, opportunity. These funds make their cash from the medium-term prospect of a relisting of the buyout, which should (touch wood) have had its value geared up by a degree of recovery in equity markets.

The trouble here is the banks again. They simply won’t contemplate the debt element for buyouts in these markets – a manifestation of them being risk-friendly only when values are over-inflated. They really just don’t get it, do they?

Similarly, the flight to quality, while exposing some of the spivvier financing operations around, is about as boring as the fundamentals suggest. The rules here are to look for companies that have a strong balance sheet, resilient margins in hard times and strong future cash generation prospects. In short, the likes of the public utilities. But I would respectfully suggest that it’s no way to get rich, because a geared-up opportunity isn’t there and, I would add, regulation of such industries is always an uncertainty and consequently a dampener.

No, the answer must lie in sunrise industries. Needless to say, I don’t mean those of Japan (though there will doubtless be cheap opportunities there). I mean those defined as immature by function, rather than by geography. The real stars have to be the next generation of Internet businesses.

Just look at some of their valuations. America Online is forecasting revenue increases of some 50 per cent in the year to next June and, at eight times this year’s revenues, its valuation is on a par with pharmaceutical giant Pfizer – only America Online is growing three times as fast. Similarly, while all about were losing their heads, an online auction house called eBay saw its shares rocket by more than 160 per cent in post-flotation trading a fort-night ago.

Other high-technology industries are suffering. Software manufacturers such as Mysis, Logica and Sema are exposed to the developing fortunes of the financial services sector. But the Internet, in many developing applications, is becoming the financial services sector.

Investors will have missed some of the ride with the likes of America Online, but the new billionaires of the next three to five years in volatile and developing economies will be those who identify the emerging markets for the Internet.

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