Since the start of 2002, the Dow Jones Europe Stoxx Technology (Price) Index fell by nearly 45%. ...
Since the start of 2002, the Dow Jones Europe Stoxx Technology (Price) Index fell by nearly 45%.
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, however transmissions, mainly from text messaging, only accounts for 10 to 11% of Vodafone's revenue.
'Telecoms companies have been de-rated. On the other hand, costs have gone up as companies buying stakes in each other are incurring the cost of 3G licenses. As a result, many stocks lost 80% to 90% of their value.'
Plagued with debt, the European telecoms sector is struggling to recover from the TMT crash. Companies within the industry, despite being cash generative, have incurred high costs in the form of licenses.
'The telecoms sector is among the worst performing sectors of Europe,' says Simon Kirton, fund manager of European equities at Aberdeen. 'The fundamentals of the sector are not good. Companies have high debt levels and have overpayed for 3G licenses.'
However, recently the sector has steadied in the market. '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. We are seeing some improvement in the market.'
There are serious issues within the industry over the debt of companies. Deutsche Telecom and France Telecom have around E60bn to E70bn in debt.
'Within the sector, there are concerns for France Telecom and Deutsche Telecom as it is believed 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.'
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.
Chris Gent, chief executive of Vodafone, thinks camera phones that allows photos to be taken via mobiles will be a successful project. 'If the telecoms operators receive a boost, equipment makers will do well as the operators will be pumping investment in the system,' he says.
fund manager comment: AEGON
The second quarter of 2002 was all one-way traffic for European equities: the wrong way, and at an increasing speed.
Recently, markets have been hit by a slew 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. 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. A lack of confidence in US corporations' ethical standards has caused a flight from the equity markets; if this situation persists, there will be continued severe repercussions ahead for stock prices.
There are some grounds for optimism. Looking at long-term average valuations, Europe's markets are fair value. In the three months to the end of June, markets fell almost 20%. This has only happened on five occasions in the previous 30 years and each time it has been a good time to buy.
But this is not enough to support the markets. There has been scant evidence of any improvement filtering through to corporate earnings, and negative earnings revisions are still rife. Another negative factor is the strengthening of the euro against the US dollar. This damages exporters' earnings, a main growth driver, and also damages earnings from overseas subsidiaries.
European markets are directionless and uncertain. Sad to say, there is little reason to expect any sustained rally in the short term.
Alastair Duffy is manager of the European Fund at AEGON Asset Management
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