As Vodafone bids for Mannesmann there are plenty of fund managers who see telecom prices now reachin...
As Vodafone bids for Mannesmann there are plenty of fund managers who see telecom prices now reaching unrealistically high levels.
After a short cooling down period, the past month has seen European telecoms go through a resurgence helped by the bid now taking place.
John Ewart, investment manager with Britannia Asset Management, says: "We feel the telecoms market should take a pause for breathe and it cannot justify some of the current valuations at these prices. However momentum can be a strong driver of share prices in the short term."
An example of the sector's amazing run is the recent float of Spanish internet provider Terra Networks, whose price managed to triple over the course of its opening week on the Madrid Exchange.
Ewart, believes there are other telecommunication companies that have also experienced unrealistic growth.
He says: "The catalyst for this month's boom, has been a reversal in European bond yields and Vodafone's bid for Mannesmann. In Germany the bond yields have gone from 5.5% to as low as 4.9% and investors have turned to the telecoms. Vodafone's bid is hostile, it is cross border and it raises the prospect of further M&A in the sector as companies position themselves for the long term."
Vanessa Barnato, director of European equities at Clerical Medical agrees the share prices can't keep going up. In the short term she believes much of the good news is now in share prices.
She adds: "There is no doubt the last month has been good for the telecoms but performances like Terra Networks have been surprising. We bought into Terra Net and expected it to do well. It was 50 to 60 times oversubscribed."
The volatility in the telecoms market is well illustrated by the share price moves in Mannesmann. While the price of Mannesmann has jumped 30% in the past month, just recently investors have decided the price was too tempting and profit taking has taken place. As a result the share price fell from E210 down to E186, even though it is now a bid target.
Britannia Asset Management is currently overweight in telecoms, even though the group has taken profits recently. Overall it plans to stay overweighted in the sector. Clerical Medical is also comfortable with the overweight position it has.
Barnato is focusing on Italian telecoms, a sector that in the past has been a lacklustre performer. The market has seen the recent breakdown in plans for a share swap between Telecom Italia, Tecnost and Olivetti as a positive, hence the price of the majority of Italian telecoms have moved upwards, however there are still significant risks in this area. She says: "Telecom Italy Mobile had been undervalued for some time. This would be our preferred investment in the Italian sector".
Britannia Asset Management is looking more at the alternative carriers and is currently researching several companies in that sector with a view to further investment.
Ewart is confident that these stocks will build up their market share among other telecoms and believes that at the moment telecoms, as a whole, are long-term buys.
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