Telecoms investors hoping their defensive plays will soon turn into growth propositions should look elsewhere, on the evidence of last week's Mobile World Congress in Barcelona.
-- Mobile carriers digging in for a tough year
-- Nokia expects downturn to be long and deep
-- Some investment banks see better growth elsewhere
-- Need for recovery in end-demand from consumers
Holders of technology stocks hoping to profit from a boom in smartphone and netbook sales, coupled with a cyclical upturn, will also have to be meticulous about their timing, going by comments from executives at the world's biggest wireless fair.
Mobile carriers say they are digging in for a tough year, while Nokia Oyj, the world's biggest phone maker, said it expected the downturn to be long and deep.
Microsoft Corp Chief Executive Steve Ballmer reiterated his view that the world was going through not a temporary downturn but a fundamental economic reset.
Some investment banks, seeing potential for other sectors to benefit sooner from macroeconomic recovery - when it comes - are already shifting away from telecoms in search of growth.
The wireless telecom services sector trades at around 10 times expected 2009 earnings, according to Reuters data and excluding companies with a market value of less than $1 billion, with major communications equipment companies at about 17 times.
By comparison, the troubled banking sector trades at just five times expected 2009 earnings and has the evident support of government bail-outs around the world to aid its recovery.
J. P Morgan downgraded telecoms to "neutral" from "overweight" earlier this month as it began to shift back to cyclicals, and a spokesman said this week it was sticking to that view. The bank cited "an expected slowdown in the rate of macro deterioration, a stabilising credit backdrop, aggressive fiscal and monetary policy action and a steepening yield curve" as reasons to emerge from the shelter that telecoms offered.
RECOVERY BET:
Many technology investors, at the opposite end of the risk-appetite spectrum, have been betting on a cyclical recovery in the second quarter or second half of this year.
That bet has been largely founded on the fact that manufacturers of consumer electronics have been running down inventory of components and will soon need to restock. But without a recovery in end-demand from consumers - of which there was little sign last week - such effects will be short-lived.
Peter Bauer, chief executive of German chipmaker Infineon, told Reuters the company's sales run rate should improve next quarter and would then more truly reflect demand. But he said this did not mean sales would start to rise and he did not know when this would happen. "If I could answer that question, I would be relieved from many difficult decisions to be taken in the next couple of weeks," he said.
Richard Windsor, technology specialist at Nomura, said he had not been keen on the sector for some time. Asked if anything at last week's fair might alter his view he said: "Nothing materially changed." Research firm Gartner cut its forecast for the semiconductor industry - for whom mobile phones are an important end market - on Wednesday, saying it now expected 2009 sales to fall 24 instead of 16 percent. The industry will start to bounce back in 2009 but will reach 2008 levels again only in 2013, it predicted. And fellow technology research firm IDC said this week the western European mobile phone market had entered recession.
CROWDED MARKET:
Within the telecoms and technology sectors, however, some winners and losers did emerge from Mobile World Congress. Ericsson and Alcatel-Lucent won a multi-billion-dollar deal to build a new high-speed wireless network for Verizon.
Top wireless chipmaker Qualcomm and Nokia buried the hatchet after years of legal disputes over intellectual property rights, saying Nokia would start to use Qualcomm's chips in its smartphones. As well as giving Qualcomm access to a major share of the smartphone market - seen as the only segment of the mobile phones market likely to grow this year - the deal will also help Nokia to lower production costs.
But the entry of more computer companies into the smartphone market will further challenge Nokia in this high-margin business, after Apple Inc's debut with the iPhone. Asian PC makers Acer and Asustek unveiled new models at the show, joining Hewlett-Packard and Lenovo in the increasingly crowded segment.
The news led Credit Suisse to cut its 2009 earnings estimates for Nokia by 12 percent this week. "We are still concerned about the increasing competition in the smartphone space with current vendors strengthening their offering (HTC), Palm, Samsung and newer players (Acer, Huawei) entering the arena. "As such, we assume that Nokia's smartphone share will decline," the bank's analysts wrote.