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Investment Review

In the course of preparing for a seminar, I had to revise a slide setting out the TMT content of the FTSE 100 index. Despite losing a few high-flyers back in June, the latest changes in the index have accentuated the reliance of the UK&#39s leading stockmarket indicator on these three sectors. In terms of market capitalisation, new economy stocks are still in aggregate below the levels achieved at the beginning of the year but not by much. If it were not for the telecoms sector being left behind during the summer, we would be back to a position where TMT accounted for 40 per cent of the index.

The UK&#39s biggest company by market capitalisation is still Vodafone. At around £175bn, it keeps its nose comfortably ahead of BP Amoco which, despite the boost given by higher oil prices, is still worth less than £150bn. Yet Vodafone presently stands closer to its year&#39s low than the peak of more than £4 a share achieved early in 2000.

Part of the reason is the overhang of shares being made available by Hutchison Whampoa as it unwinds its holding following Vodafone&#39s takeover of Mannesmann. However, Lombard Street Research, the economic think-tank headed by Professor Tim Congdon, believes there is a more important and, arguably, more sinister reason for telecom shares to underperform. Moreover, he contends this may have knock-on effects for the rest of the market.

Everyone knows there is a communications revolution taking place. The use of mobile phones is increasing rapidly and could well overtake fixed-line connections as the preferred means of carrying calls. Digital technology is being introduced in telephones and broadcasting, allowing ever more powerful computers to talk to each other using the internet, demand for which is doubling every 100 days. It is all very exciting and explains in no small measure why investors have been so upbeat. It will also be very, very expensive.

Governments are charging for new mobile phone licenses and already tens of billions of pounds have been laid out by companies seeking to gain a place at the table. Fibre-optic cables are replacing existing fixed-line connections as the best means of carrying vastly increasing traffic at the speeds now required for data transmission while new satellites will be needed as more and more information is beamed around the world. As a consequence, many telecommunications businesses are having to borrow heavily. All this money will have to come from somewhere.

This problem has been well signalled. BT, now trailing Vodafone with a market capitalisation less than a third of its rival, has already indicated it may have to sell off businesses to reduce indebtedness. But the contention of Lombard Street Research is that telecom companies will need to borrow in the months and years ahead and is concerned that sufficient cash can be found. Merrill Lynch has estimated that phone companies will issue more than $40bn of new bonds before the end of the year. There will have to be buyers of these bonds but this is unlikely to be sufficient to maintain these companies&#39 ambitions.

According to data published by the Bank of England, nearly £55bn was held on deposit by UK life companies and pension funds at the end of the first quarter of the year. This is probably about par for these institutions, which like to keep a minimum of around 4 per cent in cash. It is hard to see them stumping up much to help bail out the phone companies. Admittedly, telecommunications is a global business, so they will not just be looking at the UK to provide them with the money they need. Still, it will be interesting to see if they can gain sufficient funding. Perhaps this explains why the last T in TMT looks as though it could stand for Trailing.

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