Out with the new, in with the old, as telecom stocks get the boot
LONDON, Sept 4 (AFP) -
Telecom companies, after watching their share prices plunge during a year-long market rout, are now suffering the humiliation of being ejected from leading share indices, in a shake-up that could deliver a fillip to Europe's battered stock markets.
When the pan-European Stoxx 50 index sprang into life on Tuesday, it did so without two big telecoms names: France Telecom and Marconi of Britain, while the sister Euro Stoxx 50 index waved goodbye to Dutch operator KPN.
Into their shoes stepped three companies with their roots still firmly planted in the so-called old economy: French utilities group Suez and Anglo-Dutch consumer products giant Unilever replaced France Telecom and Marconi, while French glass maker Saint-Gobain shunted aside KPN.
Getting the boot from a leading shares index is bad news for a company because it usually prompts fund managers and tracker funds to sell the stock.
France Telecom shares fell by more than 15 percent in a week in anticipation of the Stoxx shake-up. With its share price now languishing below 34 euros, a peak of 200 euros is but a distant memory.
But the shift away from telcos to old economy stocks could provide support for European share indices that have suffered of late at the mercy of telecom companies, especially giants such as France Telecom, Deutsche Telekom, British Telecom and Vodafone.
"European markets are more influenced by the telecom weighting and US markets are more influenced by the tech weighting and certainly in the last couple of years the two haven't necessarily moved exactly in line," said SG Securities global equity strategist Daval Joshi.
"At the height of the TMT (telecom, media and technology) euphoria, telecom weighting in Europe was pretty high and it's come down as the market values have come down," he told AFP.
While the big guns are unlikely to be relegated from country-specific indices such as the DAX, CAC or FTSE, their departure could provide broader indices with some support because old economy stocks have performed better during the recent market slump.
Telecoms companies have been hit particularly hard by the economic slowdown, which has meant that companies have slashed their investment spending on equipment -- bad news for the likes of Marconi and French rival Alcatel.
The exorbitant cost of third-generation mobile telephone licences has left operators nursing large holes in their bottom lines.
Marconi, which announced on Tuesday the departure of its chairman and chief executive while slashing another 2,000 jobs, has seen its share price fall from a peak of 1,250 pence in September last year to about 60 pence on Tuesday.
The group is now facing possible ejection from the FTSE 100 index of leading London shares, as is operator Colt Telecom.
But what goes down may also go up again, and telecoms companies could be a key driver in a stock market recovery, analysts say.
HSBC strategist Jason James believes that a rebound in the telecoms sector could lead the market by the nose in the weeks and months to come as the new mobile phone technology GPRS (general packet radio services) take off.
Joshi at SG Securities said: "Obviously the larger telecoms stocks will still be in the indices, it's the smaller ones that go out first.
"So if there is a big bounce in telecom stocks then clearly the ones already in the indices will help pick the index up and ones that have fallen out may re-enter."
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