The technology, media and telecoms sectors are still in trouble, with the Nasdaq index off 69 per cent since its peak in March 2000.
Misery abounds and there are four explanations on offer: a surfeit of cheap finance during the boom of 1999-2000; the fact that equipment installed by those over-funded at that time has yet to be updated; a technological disjunction akin to that causing turbulence at the ends of the last two decades; and the lack of killer products to persuade consu-mers to part with hard-earned pounds, dollars or euros.
The cheap finance story was certainly true up to March 2000, but it has hardly been the case since. Indeed there is a dearth of finance at almost any price. This is no bad thing, because cheap money is treated cheaply.
The equipment overhang from the boom years is also coming to an end, with the mobile phone operators signalling that their capital spending is to increase in 2003. The alternative telephone carriers are going out of business and the media sector is going through rapid consolidation as regulators in France, Germany and the UK get out of the way.
The sector has certainly undergone a technical disjunction, much like the one 10 years ago which finished off the makers of mini-computers, or the one 10 years before which left IBM a wounded giant surveying the ruins of its mainframe competitors. This time around the problem, for European manufacturers in particular, is the arrival of a new generation of mobile technology. Just like their predecessors making televisions at the end of the Eighties, the manufacturers managed to kid themselves they had a technology that would control the market and guarantee growth. It has not.
On the other hand it is a mistake to dwell on the lack of a killer product. There is always the prospect of new demand, despite uncertainty about which particular technological bandwagon will win. I have no doubt that one of the broadband technologies – broadcasting, fixed line or wireless – will scoop the pool. When and which is uncertain, and also unimportant.
This is because the pivot on which the European sector will turn is the ability of the phone network operators, the biggest single group of customers, to place new orders. The two largest, France Telecom and Deutsche Telekom, are out of cash, awaiting recapitalisation. For the first year or so of the downturn, managements were unwilling to recognise the failure of their plans but reality is beginning to impinge, particularly after Deutsche Telekom pulled the sale of its T-Mobile subsidiary.
So I would recommend waiting out the third quarter. Telecommunications refinan- cing is far from the highest priority of the new European governments, but it is not a negligible factor either. I would look out for action by the French and German governments after their elections, if not the emergence of an attempt to trick out support in European colours.
Markets always surprise, on the way up as well as down, and they may surprise us all on this occasion by anticipating the events I have outlined. But for the time being, technology, media and telecoms stocks remain on the floor.
If I am right about the sequence of events, recovery will come first to the telecoms equipment makers and those supplying components to them. These stocks will be bought once the refinancing of their customers is on the agenda. Then will come the network operators themselves as their capital position is seen to be stabilised. At the rear will follow software and service suppliers, and media firms, which keep to their own cycle.
Miles Saltiel is director, TMT banking at WestLB Panmure
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