The Week In Review: Telecoms are on line for a fresh upturn

Imagine a portable phone that acts as a mobile phone when you are out-and-about but connects with the cheaper fixed-line networks, albeit without the need for wires and cables, when you are inside making calls from home or the office

Imagine a portable phone that acts as a mobile phone when you are out-and-about but connects with the cheaper fixed-line networks, albeit without the need for wires and cables, when you are inside making calls from home or the office.

This convergence of mobile and fixed-line networks is exactly the sort of technological development that many investors are predicting will dominate the sector this year. The other is the outcome of various regulatory developments and BT Group, so long the lame duck of the sector, stands to benefit from both.

Having had a good run from a low of 169p early last summer, BT shares have risen to finish at 207p yesterday. However, on a forward price earnings multiple of just 11 for the year to end March 2006, the stock is still cheap compared with its big European rivals.

But BT is not simply a valuation play. It has hitched its wagon to the concept of mobile and fixed-line convergence and will roll out a product, called Bluephone, later this year. Rather than being a pure mobile play like many of its rivals, BT is an integrated business and fixed-mobile convergence could give renewed relevance to its dominant but always vulnerable looking position in the UK fixed line market.

That continues to come under attack. But other technological developments, such as the increased uptake of broadband internet connections, will also play into its hands.

From a regulatory point of view, Ofcom has laid down a new regime governing how BT Retail and BT Wholesale do business with each other to try and ensure fairness for rival retail operators who also have to deal with BT Wholesale. While the regulator has not insisted BT should be broken up, it seems inevitable this will happen in 5-10 years time. These behavioural remedies are a first step in that direction and the greater disclosure required under the new regime will result in a better managed BT and the realisation of more shareholder value.

As for the sector's other behemoth, Vodafone, it is focused on third generation (3G) services and making sense of the jigsaw of acquisitions around the world that Sir Christopher Gent masterminded. Like its rival mm0 2, both are locked in an increasingly punishing battle at home as tariffs become ever more competitive.

Perhaps the dark horse for this year will be Cable & Wireless. After fearing the worst for its UK business, the market breathed a collective sigh of relief in November that results were in line with expectations. It has even started a share buyback programme and has plenty of cash. As a punt C&W could be a winner.

SAGE

It is five years since businesses large and small were on their Millennial spending spree. It is worth betting now that spending will recover this year, and worth investors venturing back into the decimated software and computer services sector.

Sage sells vital software to a client base of almost 4 million small businesses. It is as dull as tech gets, but lucrative and the company has squeezed out profit growth every year. US trading ought to improve this year, so the shares will put in a good performance.

LOGICA CMG

Investors ought to look for companies able to offer more complicated systems integration services (such as Morse), which can operate a very low-cost business model (such as Asia-based Xansa).

And although there are nerves surrounding the 2004 figures, which are due to be published soon from LogicaCMG, the UK's biggest services company, its position in the public sector will act as a bulwark while it awaits an upturn in private sector work in continental Europe. Its shares are worth a buy.

ARM HOLDINGS

In IT hardware, the semiconductor cycle - the ebb and flow of demand for microchips - appears to have peaked, barely months after investors realised it was on the up. That leaves the companies sitting on precarious stock market valuations, and ARM Holdings, in particular, is at high risk of disappointing.

MARCONI/SPIRENT

The real stars could be the dogs of the previous five years, the telecoms equipment makers. An industry plagued by over-capacity ought to get back into balance as telecoms companies begin to spend on networks. Buy Marconi, buy Spirent.

Worth digging in with the miners

One of the more surprising stock market results of last year was that, despite the surge in commodities prices, mining shares actually performed less well than the market as a whole. But neither economic growth nor the Chinese industrial revolution are at an end. Projections for supply and demand this year suggest that commodities prices will remain strong.

Meanwhile, the mining giants continue their expansion but this entails big projects that will take until the end of the decade to come to fruition. Mining shares look decent value if you take a long view.

Our favourite of the FTSE 350 miners is the Chile-focused Antofagasta on the basis that, in a consolidating sector, the expanding copper specialist could become a takeover target, especially now its 65 per cent shareholder has stepped back from the chairmanship.

The biggest, most diversified miners are Anglo American, BHP Billiton and Rio Tinto, the latter offering probably the best mix of assets at a relatively lowly share price. Anglo American risks underperforming this year, if a consumer slowdown takes the lustre off precious metals prices.

And what of the minnows? Investors will succeed who can tune out the stock market whispers to concentrate on the real value enhancing moments for speculative mining ventures. These include the proving up of reserves, partnership deals with bigger industry players, and the results of a feasibility study of production.

A few ideas. Asia Energy, which is sitting on 430 million tonnes of coal in Bangladesh, is one of the riskiest and potentially most rewarding investments. We also like European Nickel, where confidence is rising that it will be able to start production in Turkey. Frontier Mining has one of the world's cheapest- to-run gold mines in Kazakhstan. And a recent float, Uruguay Mineral Exploration, ought to be able to fund its racier ventures with the stable cash flows from its first goldmine.

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