With European markets directionless and uncertain, there is little reason to expect any sustained ra...
With European markets directionless and uncertain, there is little reason to expect any sustained rally in the short term, according to Alastair Duffy, European fund manager at Aegon Asset Management.
He says: 'Recently, markets have been hit by a lot of bad news in the form of accounting scandals. News of energy companies booking round-trip trades, that the Securities and Exchange Commission was investigating Tyco, and that WorldCom and Xerox had overstated profits, have all served to stoke investors' fears.'
It is turning out to be the year of the balance sheet, according to Duffy. Highly valued stocks with negative earnings revisions are to be avoided, as are undercapitalised situations like Ericsson, which may dilute shareholder value by issuing new equity.
'Following the demise of the technology theme, no replacement is on the horizon to drive Europe's markets forward,' Duffy says. 'A lack of confidence in US corporations' ethical standards has caused a flight from equity markets. If this situation persists, there will be severe repercussions ahead for stock prices.'
Despite a fairly general malaise in the market, the worst hit sector has been telecoms, with the Dow Jones Europe Telecommunications Index down 74.05% from March 2000 to August 2002 in local currency terms.
Mark Webster, senior investment manager at Exeter Investment, says: 'Two years ago, there were great hopes for telecoms because the industry thought the mobile phone would become a source of data transmission. By 2003 Vodafone was expected to derive 25% of its revenue from data transmission, but transmissions, mainly text messaging, actually only accounts for 10%-11% of Vodafone's revenue. 'Telecoms companies have also been derated on a grand scale and costs have gone up as companies buying stakes in each other are incurring the cost of third generation licenses. As a result, many stocks lost 80%-90% of their value.'
Plagued with debt, the European telecoms sector is struggling to recover from the technology, media and telecoms crash. Companies within the industry, despite being cash generative, have incurred high costs in the form of licenses.
Simon Kirton, European fund manager at Aberdeen, is slightly more bullish on the sector, as he feels that, although many companies have high debt levels and have overpayed for 3G licenses, the sector has steadied somewhat lately.
'After an appalling 18 months, we saw telecoms stabilise in June,' says Webster. 'One reason might be that investor concerns have turned to the global economy and we are seeing some improvement in the market.'
However, there are serious issues within the industry over the debt of companies, with Deutsche Telekom and France Telecom each having around E60bn-E70bn in debt.
'The feeling is that if they are not bailed out by their governments, investors will have to contribute in the form of a rights issue,' says Kirton.
A rights issue of the size needed to reduce the debts of these companies will dilute the holdings of shareholders,' he adds.
Despite these concerns, Webster believes if the companies can boost demand through a new technology or products, this will generate enough income to tackle the debt problem through the supply chain.
Some stabilisation in telecoms market.
Some opportunities through stockpicking.
New technology may boost demand.
Debt problems at European incumbents.
3G has not taken off as expected.
No theme to drive European markets.
Paul Bruns and Elaine Parkes
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