Money & Investing: Fund Managers Buy Up Telecom Shares Ahead of Brokerages's Recommendations
September 27, 2001
By KAREN RICHARDSON
Staff Reporter of THE WALL STREET JOURNAL
HONG KONG -- Since the terrorist attacks in the U.S., several major brokerage houses have been urging portfolio managers to jack up their exposure to Asian telecommunications stocks, attracted to the sector's defensive nature in these volatile times.
Nice trade, but just a little late, say some fund managers, many of whom had started adding to their underweight or neutral telecom positions before the attacks.
Fund managers bought telecom stocks because they were cheap. For weeks, they've been watching returns on their holdings climb more than 20% while brokerage analysts came out a week after the disaster to reflog months-old "buy" recommendations as newly defensive safe havens.
Investment banks J. P. Morgan Chase, Merrill Lynch and UBS Warburg issued new equity strategy research notes on Sept. 20, all advising investors to increase their positions in Asian telecom stocks to overweight. "The telecoms sector looks best to us now," writes John Dolfin, regional equity strategy analyst at J.P. Morgan in Hong Kong. Like his counterparts at the other banks, Mr. Dolfin cites low valuations relative to global peers and limited global demand exposure as key defensive features. "We place our biggest sector overweight in telcos, with special emphasis on the Chinese cellulars."
So what's wrong with this picture? Nothing, except for the timing and the reasoning, fund managers say. The new defensive reasoning begs the question: What happens when the Asian telecom sector ceases to be defensive? If these stocks were a buy as growth stocks when prices were rising, a buy when prices were falling before Sept. 11, and now a buy as undervalued defensive stocks, just when do they ever become a "sell"?
"I always get a bit concerned when a sector can go from being growth to defensive in a couple of weeks," says Ajay Kapur, chief Asian-Pacific equity strategist at Morgan Stanley in Hong Kong, one of a few major investment bank analysts not to recommend an overweight position in telecoms.
Eric Sandlund, Chief Investment Officer at Merrill Lynch Investment Managers in Singapore, agrees. "The reason people invest in equities is their growth prospects, not necessarily because of their defensiveness," he says. "At times like this, people need to understand that and not get carried away with chasing stocks that have some defensive features that could quickly get overvalued." Merrill Lynch is currently overweight Asian telecoms, particularly in Korea and China. But Mr. Sandlund stresses his team increased its weightings due to valuations, which had fallen to "very attractive levels" before the terrorist attacks. Merrill hasn't added to its position since Sept. 11, he says.
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If what analysts were advising in putting buys on telecoms was simply a trade -- as opposed to a longer-term investment -- then the time for that trade may already be over. Here's an example: Hong Kong-listed China Mobile, the mainland's biggest wireless carrier and rated a "buy" by J.P. Morgan, Merrill and UBS, is up 8% since its close of 21.45 Hong Kong dollars (US$2.75) on Sept. 11, and 27.5% higher than its intraday year-low of HK$18.15 on Sept. 12. If investors had bought it at the close of trade on the 20th, the day the analysts' research was published, they would be up 0.2%.
The bulls argue that at a price-to-earnings ratio of about 20 times, this stock continues to carry an attractive valuation relative to its debt-laden global peers. After all, it's down 71% from is HK$80 high on March 6 last year, when some analysts were saying it could go even higher.
But others are apprehensive. "If some of the quantity of buying in the Asian telecom area continues, the valuations may begin to look a bit more stretched to us too," says Mr. Sandlund. "Those stocks have actually performed extremely well off their recent lows, so we don't think it's such an obvious place to invest right now, and clearly not as attractive as it would have been a week ago."
The dissonance between the analysts' bullishness and fund managers' investment concerns appears to be one of many lamented cases of misunderstanding between the so-called sellside and buyside.
Most analysts agree a stock labeled defensive doesn't mean its fundamentals have changed, while fund managers would argue a stock is only ever worth considering when its fundamentals justify its valuation, or are better than its valuation suggests. When the valuations are too good to resist but risks still remain, it's simply time to call a trade a trade.
"Would I trade China Mobile? The answer is yes," says Elizabeth Soon, director at Schroder Investment Management, which manages about US$23 billion across the region. Ms. Soon is still holding the stock she bought when it slumped to HK$21 on Sept. 11. "It's still not a great sector, but it's the less bad than others," she says.
Write to Karen Richardson at karen.richardson@awsj.com2
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