Newspaper article The Journal (Newcastle, England)

Haven from Rece Ss Ion Everyone's Aim

Newspaper article The Journal (Newcastle, England)

Haven from Rece Ss Ion Everyone's Aim

Article excerpt

Byline: ANDREW MILLER

GIVEN the seemingly dire economic backdrop, equity markets look set to continue to struggle in the short term, despite their rally from the lows in early March.

Perhaps more worryingly, even traditionally "defensive" areas of the stock market, such as healthcare and utilities, do not offer a haven - these areas remain extremely expensive in relative terms, reflecting the fact that investors remain more than willing to overpay for earnings visibility at present. So, is there anywhere safe to take refuge in equity markets?

One area that does seem to offer some relative safety, at least in the short term, is telecommunications, a sector we have liked all the way through the market downturn.

For some time, we have viewed telecoms as a sector that offers good earnings visibility and decent yields - with the latter particularly attractive when capital returns from equities have been so poor.

We also feel there is some scope for growth in income from the sector at a time when other sectors are either cutting back on dividend payouts or worse, being forced into rights issues in order to avoid breaching banking covenants.

Of course, telecom companies have seen some earnings downgrades - it's hard to think of any sector that hasn't over the past six months - but these have generally been small compared with those in the rest of the market.

The image of telecoms as recession proof has been dented a little, with downgrades to certain areas: broadband expansion has slowed because of the grim state of residential housing markets, while a small decline in growth and slowing in the renewal of mobile contracts has been apparent.

That said, we believe that the sector should be recession-resilient, with communication costs ranking high on the list of household "must haves".

One issue that won't go away, however, is mobile call termination rates (MTRs) with the market still digesting how reduced costs will be implemented on a pan-European basis. …

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