Creating Benchmarks

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Last Update:
10 May, 2000

The Edge : March 27, 2000

Technology Wise
Creating benchmarks
This week, we start with the first of a four-part series on New Economy stocks

By Muhammad Azraini Abdul Hamid

Indices have long been used as a tool to measure the performance of the stock mar
ket. Charles Dow originated the Dow Jones Averages in 1884. The Dow Jones Industrial Average initially began with 12 companies, but was later increased to 20 stocks in 1916 and to 30 stocks in 1928. The index was an attempt to view the general trends and level of the stock market.
Today, there are many variations of indices around the world. Some of these indices reflect the general performance of a country’s capital market, while others focus on specific sectors in the economy. The KLSE Composite Index, for example, represents the general condition of the economy. In Malaysia, there are several indices that represent the different sectors. The latest additions are the technology indices.
In recent years, global interest has shifted towards technology stocks. Malaysia has seen its fair share of rising technology-related stocks. On the Nasdaq (National Association of Securities Dealers Automated Quotation System), the dot.com companies have seen their share prices multiply manifold. It is only a matter of time before the “Net” fever hits Malaysia. Even companies that have merely shown interest in the Internet business have seen their share prices soaring. Some of the companies are not even in related industries to the Internet companies they have purchased!
The Malaysian Technology Development Corporation (MTDC) first introduced the idea of a technology index last October at its Annual Technology Conference. The MTDC Technology Index is aimed at promoting the technology industry in Malaysia and to highlight its high returns to investors.
The index can be used to compare its performance with that of a particular company in the same industry or with its counterpart in other countries. Fund managers may use the index to gauge the performance of their portfolios. If the index gives higher returns, it would be practical to invest their money in the component stocks to generate similar returns.
There are other existing technology indices around the world, such as the H&Q Technology Index, the Merrill Lynch Technology 100 Index and the GSTI Composite Index by Goldman Sachs. These indices have different categories of technology and number of components. Although some may see the Nasdaq 100 as the benchmark for technology companies in the US, others may look at the three technology indices as their benchmark. The pool of companies would naturally determine which indices an investor will look at. The technology indices created by the investment bankers may give higher returns to investors while the Nasdaq 100 may not give as high a return.

The MTDC Technology Index is set to become the benchmark for technology stocks in Malaysia. It has a wide definition of technology areas, as limiting itself to a particular sector in the technology industry would only make it a sub-index. Thus, it is appropriate that it imitates the Nasdaq 100 to cover a wide range of technology activities. The technology areas covered by the MTDC Technology Index are:

	Advanced electronics;
	Information communications technology;
	Equipment/instrumentation, automation and flexible manufacturing systems;
	Biotechnology, bioconversion and genetic engineering;
	Electro-optics, Non-linear optics and optoelectronics;
	Advanced materials;
	Energy sources;
	Aerospace;
	Transportation;
	Services; and
	Emerging technologies.

The MTDC Technology Index examines the technology used and the outlook of the company in terms of research and development, and investment. The companies chosen were based on their ability to stay competitive in the global marketplace.
Technology indices not only represent the particular technology industry, it also represents the “new economy”. The new economy comes with hope on new technological innovation. Hardwares are made smaller, softwares are made friendlier.
In order to see the potential of the new economy, it is right that a technology index be used to track the performance of the technology companies.

Muhammad Azraini Abdul Hamid is head of the market information unit at MTDC Capital & Technology Research