By Jeremy Knight, European fund manager at Legg Mason Investments With equity markets bouncing s...
By Jeremy Knight, European fund manager at Legg Mason Investments
With equity markets bouncing strongly on the outbreak of hostilities with Iraq, it is hardly surprising the telecom, media and technology sectors have outpaced the wider market.
The media and IT sectors had been poor performers and were looking oversold. The telecom sector on the other hand had outperformed both the counterparts in its sector and the FTSE World Europe index over the past year. This is despite record corporate losses in their respective countries by the likes of Deutsche Telekom and KPN. In recent months investors have rewarded these incumbents' cash generation abilities and renewed focus on paying down debt.
Within the telecom sector, fixed line businesses remain under pressure in most markets on the back of continued substitution of fixed line voice traffic by mobile, while mobile demand is still experiencing growth despite seemingly high penetration rates.
For mobile, the risk remains that the take-up of the much-hyped third generation (3G) mobile phones is less than anticipated. Overall, the mobile sector is preferred over the fixed line area. We are cautious on British Telecom long term as its lack of a mobile arm is a concern. We have recently focused on the Russian mobile sector, which is very cheap and has huge scope to grow.
Revenues for the economically sensitive media stocks (advertising agencies, TV, and national newspapers) remain lacklustre with companies downbeat about earnings visibility. In contrast, early cycle advertising revenues for local press and radio (especially in the UK) are improving, perhaps signalling an upturn in economic growth. From a structural point of view, prospective new regulation in the UK permitting changes to foreign and cross ownership of media assets could be a catalyst for performance.
Our media holdings are generally focused on niche areas. From the professional publishing side, although the IT sector remains difficult, certain companies are performing well. For example, Reed is having great success in migrating customers on-line, an immense cost advantage. In addition, VNU, the Dutch publisher, is refocusing on higher growth and higher margin businesses such as media measurement and marketing services.
Finally, within the IT sector, pockets of growth are evident in consumer electronics while in IT services area extreme undervaluation exists.
Broadly speaking, we have limited exposure to IT hardware stocks as overcapacity and price erosion persist. Favoured stocks include Micronas, a niche semiconductor company, which is benefiting from the digital consumer revolution.
We also hold Ordina, the Dutch IT services company, which has relatively stable revenues, is a good cash generator, and is attractively priced on a price earnings ratio of six times 2003 earnings.
While the unprecedented growth rates of the sector in the late 1990s may be a thing of the past, niche areas continue to exhibit high growth rates. Even if this rally proves short-lived, we believe there are enough attractively valued stocks with strong fundamentals in which to invest.
More realistic valuations.
Attractive niche situations.
High sensitivity to economic recovery.
Excess capacity remains.
Low visiblity continues.
Unhelpful economic backdrop.
Joe McDonnell joins as head of portfolio solutions (EMEA)
Fidelity Multi Asset CIO's outlook
Willis Owen report
From 1 March
More than 16,100 clients compensated