Investment: Hi-tech fortunes lure the private investor

The private investor is returning to the stock market. Spurred by the speed and low cost of internet and telephone trading, investors are piling into shares. Stockbrokers claim that their offices are so busy that they are struggling to keep up with demand. Even traditional investors are joining in - ditching their holdings in companies such as Marks & Spencer and Reckitt & Colman to buy hi-tech stocks.

The prices are stunning market professionals. "Nobody knows how to value these stocks, so they don't give a damn what they pay for them," says Alexis Johnson, senior trader at Winterflood, a leading brokerage. "For too long the market has underestimated the private client, but last week we accounted for 30 per cent of the trades on the stock exchange."

It is tempting to dismiss the bullish mood as collective madness, which is due to suffer a sharp correction. But anybody who listened to the doom- laden warnings about Wall Street's imminent collapse over the past two years from publications such as The Economist will be out of pocket. The new paradigm of growth, low inflation and interest rates, partly inspired by America embracing the hi-tech revolution, shows little signs of slowing up.

Many analysts expected the market to slow with the onset of the holiday season. "Traditionally there is a January boom, when traders return after the Christmas break," says a broker. "Everybody has decided to get in early this year, particularly when they realised that the millennium bug was nonsense."

A fund manager at a large American investment bank agrees. "There was a sense that if we wanted to own something in the new year, we should buy it in November," he says.

The boom is very specific: it is three sectors which are driving the market: hi-tech, telecoms and media. Shares in these sectors rose by 20 per cent in November alone. Losing out have been car companies and the retail sector - down nearly 15 per cent on the year.

If British share activity is two years behind America, then Europe is often two years behind Britain. European investors began flirting with shares last year, abandoning their reliance on bonds. Now they are also piling in, chasing the stock exchanges in Paris and Frankfurt up to record highs.

For the British investor, buying European stocks could be doubly rewarding. First, share prices have not increased quite as rapidly as British shares, although low interest rates and inflation are having an impact on prices. Second, if the euro continues with its half-hearted recovery - which began last week with the news that Joseph Yam, head of the Hong Kong Monetary Authority, has started buying euros as a hedge against the dollar - then investors will reap the benefit when they sell their shares. The European Central Bank is hinting it may have to increase interest rates next year. This will strengthen the euro.

So if you are going to buy European shares, what should you buy? Even on the sleepy continent, it is the same sectors which are receiving the bulk of the investment. Technology, media and telecoms accounted for nearly 65 per cent of all European initial public offerings, according to SalomonSmith Barney, an investment bank. Sector investing is more popular than regional or country specific, although characteristics of certain countries, such as a restrictive regulatory framework, will prohibit some money flows.

German shares will be boosted if Vodafone AirTouch's bid for Mannesmann succeeds. It will be helped by the fact that 60 per cent of Mannesmann's shares are held outside Germany. Exporting companies such as DaimlerChrysler and Volkswagen should benefit from this year's weak euro. Also tipped to soar are shares in financial institutions, although many German banks are still struggling under too much regulation and a lack of leadership. However, the prospect of mergers and takeovers will give a fillip to German share prices.

The hi-tech revolution has reached Finland, where Nokia, now Europe's biggest company by market capitalisation, comprises half the Helsinki stock exchange. The internet boom has already had an effect on the Madrid market. When Telefnica spun off its internet unit Terra Networks, there was a frenzy of dealing. Terra Networks is now valued at nearly pounds 7bn. Throughout Europe the telecoms companies are expected to float their internet businesses. Deutsche Telekom will spin off T-Online, with a possible value of $20bn (pounds 12bn).

Not everybody agrees that Europe is the place to invest. "The majority of investors should stick to their domestic market," says David Loudon, partner at Redmayne Bentley, a stockbroker in Leeds. "Investing in Europe is not a practical option because it is hard to settle European equities, and there is little interest. If people are looking to invest abroad, they are going to the US. If you must invest in Europe, buy investment and unit trusts."

However, Alexis Johnson at Winterflood Europe insists that buying European shares is as simple as buying British equities. "It is an untapped, developing market compared to London," he says. "But European shares are no harder to trade."