Following the 1999 bull market in European telecom and technology stocks, Colonial First State is wa...
Following the 1999 bull market in European telecom and technology stocks, Colonial First State is warning the sector is facing increasing competition and investors will have to be more selective next year in order to achieve strong performance.
Mark Burgess, chief investment officer at Colonial, says competition is already taking its toll on PC manufacturers. As an example of this he says the share price of Dell has gone sideways for most of this year.
He adds: "Although we are positive in this area in the medium term, performance in telecoms and technology stocks will be characterised in 2000 by more selective investment in telecoms."
Aylin Uckunkaya, European fund manager at Colonial, says this involves selecting companies which either have control of their own destiny, or are distinguishing themselves from the masses, in order to keep abreast of the competition.
Examples of stocks she likes which are taking control of their destiny include Telefonica Spain and Telecom Italia Mobile (TIM) which are both entering into the relatively new Latin American market.
Uckunkaya says among the companies which is distinguishing itself from its peers is Sonera of Finland. This offers a service called Short Text Messaging, whereby text messages can be sent to mobile phones via the internet. Tim Stevenson, European fund manager at Henderson Investors, says although telecoms have rallied over 1999, the outlook for many companies is still positive.
He expects further growth in the sector, driven by increased internet and mobile phone traffic.
Nokia, Ericsson and KPN are all up by more than 80% over the third quarter in euro terms, following a rally in the sector.
He says investors are realising that Europe has a number of global leaders in the telecoms and the IT sectors. There is an element of catch up, which is complemented by the fact European stocks tend to be a lot cheaper than US stocks, relative to the growth rate they are achieving.
Corporate activity is another driver, with current merger activity between Vodafone and Mannesmann and KPN buying E-Plus, also driving up the sector, Stevenson says. He adds there are good opportunities among both incumbents and alternative providers.
Among the incumbents, Stevenson likes Telefonica, KPN and Portugal Telecom.
Stevenson adds: "Each of these incumbents is adopting its own individual strategy to overcome competition, and to realise the value inherent in their diverse businesses.
"People expected them to lose a lot of market share, which they have done, however there is also a lot of good business which they haven't yet lost. They're big in internet and big in mobile generally."
Among alternative providers, Stevenson likes Global Telesystems, which has established an alternative fibre optic network throughout Europe and is now in a position to significantly undercut incumbents.
He says: "I also like Equant, a telecoms service company. It helps others manage the huge amount of data which is flowing either within the company or externally."
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