Roger Nusbaum submits: What's my top sector pick for 2006? I have a gut feeling that a contrarian pick is the way to go with this. I think telecom has a shot of being a leader (a leader not the leader which I think will still be energy).
Part of how the market it works is that equities tend to move ahead of the fundamentals. This repeats over and over in market history. To pick telecom to do well at this point amounts to a contrarian call.
So far in 2005 telecom has badly lagged the S+P 500. The domestic telecom iShare has lagged by about 700 basis points and the global kind has lagged by even more.
To be candid, it is tough to build a fundamental case for telecom here. I think this fact is built in to the lag. Contrast that to the energy sector which is all systems go and has wildly outperformed the SPX.
Telecom stocks played a big role in the building of the bubble and the sector got crushed in a similar fashion to the net stocks, in terms of SPX weighting being cut in about half. I think the bubble was caused by too much supply and high valuations. What was right was how the Internet has changed our lives. The promise of innovation is living up to what we were told ten years ago, in my opinion.
Innovation in the part of industry is vital for the evolution of our economy. Telecom is also vital in the modernization of emerging market countries theme that I write so often about. Investing in this takes a little thought. Most emerging countries will not invest in wireline infrastructures if they don't already exist. The more likely investment will come in wireless. The existing traditional phone companies will, at some point, need to redefine and reinvent what they do.
I am absolutely convinced that this will lead to telecom substantially outperforming the market. I have less conviction about the timing. I think there is no getting around the innovation and the modernization themes for this sector.
As of now I have not yet figured out the best way to increase telecom exposure. This is something to work on over the next few weeks and implement for clients. As this site tries to focus on process this post reflects the cultivation of a theme but there is still a lot of work to do.
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