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Anders Wennberg and Martin Jonsson, who manage a sub-mandate within the Catella Hedgefond fund, both have extensive experience of TMT investment. In mid-November they visited the most important annual TMT investment conference in Barcelona to update themselves on current trends and investment themes, and not least to meet a large number of company managers.

Below they share their impressions from the conference and their investment efforts in these sectors – where we are going – and they also address concrete investment ideas that have found their way into the hedge fund.

Technology

The technology sector is the part of TMT that has fared best this year, even though it might not be obvious looking at the performance of Nasdaq, which has been weighed down by its biotech content. From a Nordic perspective, it is of course particularly interesting to follow developments in telecom equipment, which has actually managed well as a global stock-market sector but in which our local giants Ericsson and Nokia have almost collapsed.

The cheerless performance by Ericsson and Nokia is partly specific to these companies – especially in the case of Ericsson – but is mainly due to a sharp fall in the investment budgets of telecom operators.

The unwillingness of customers (Telia and other telecom operators) to invest is nothing new in this industry. Huge increases in demand for data capacity in mobile networks are leading to more sales but not to increased revenues for equipment vendors because the development of technology means that network productivity is always one step ahead – this is quite simply not a structurally attractive industry. However, in recent years the market has been buoyed by a major rollout of 4G networks in China. Now that Chinese investment is normalising, while Europe is weak and the ability of emerging countries to build 4G networks is being negatively impacted by macroeconomic factors, the overall picture is of a market that has declined by more than 10 % this year.

Next year will also offer declining investment before the situation stabilises in 2018. Most important for share prices, however, is the ability of companies to adapt their capacity and cost base to the market. Nokia has been successful with this, but despite its good efforts with stable gross margins and lower operating costs, the share has fallen 40 % this year – expectations were simply too high.

We met both Nokia's outgoing and incoming CFOs at the conference in Barcelona and also attended the company's capital markets day the same week, which in our opinion marked the floor for the stock, and we are now positioned for gains in Nokia. The residual risk we see in this share right now is that the gross margin has been maintained at such good levels – especially compared to its main competitor Ericsson. If it manages to retain the current level, as the company is communicating, we judge there to be a good upside in this stock.

The hedge fund has also taken a long position in Ericsson as we believe that profitability will start to bottom out and that there is significant potential to streamline the company. The key for this share will be an understanding that there is a crisis, and that the new management takes a tougher grip on restructuring the company – just "fine-tuning the strategy", which is the current message, will not take it far. The potential of Ericsson is best illustrated by plotting Ericsson's gross margin against that of Nokia Networks – the relative deterioration is almost incredible, and we believe there are a number of loss-making businesses within the group that could be shut down to eliminate the gap compared to Nokia. The activities that are currently making a negative contribution are the TV business in particular, but also IP routing, various IT transformation contracts and certainly also a large number of Managed Services contracts.

Media

Growth in the European advertising market has slowed, and in some cases contracted. Among the worst is the UK television advertising market, which has fallen by 7 % in Q4. This market is being impacted by weak demand following Brexit, tough comparative figures for a good Q4 last year, and by viewers structurally leaving advertising TV to watch services like Netflix. It is not just television seeing a slowdown, but also things like outdoor advertising, and JC Deceaux has seen its growth approach zero in Q4.

Competition from Netflix, and the drift of advertising money from traditional media to the internet, has hit the Nordic TV market earlier than many other countries. For this reason, companies like MTG have also been earlier than others to invest in services such as streaming video on demand or over the top TV content, and some of the viewers lost by MTG are being captured by ViaPlay. MTG has also invested in so-called eSport (computer games competitions that are becoming more popular to watch) to re-capture the younger audience. From having greatly underperformed the European media industry for several years, MTG is now showing better growth. The strong Nordic economy also helps.

Schibsted in Norway has invested heavily in so-called online classified advertising, such as Blocket in Sweden, Finn in Norway and LeBonCoin in France. In the past year Schibsted's share has greatly underperformed its more niched peers, Auto Trader (only automobiles and related services in the UK), Rightmove (buildings and houses in the UK), Zoopla (buildings and houses in the UK) and Scout (buildings, houses and automobiles in Germany). We took the opportunity to meet as many of these as possible in order to gain a better insight. It is clear that niche providers like Auto Trader are talented at developing services that mean automotive traders accept price increases. Schibsted, on the other hand, has spread itself too thinly in many countries, has invested too much in general market places, and has lagged behind in mobile and social. But, what was interesting about our meeting with Schibsted at the conference, was that it now finally not only understands this but says it is willing to act. The company promised less investment in new ventures, no new countries and a greater focus on developing the core product in countries where it is already strong. We are currently long in the Schibsted share after having previously had a short position.

E-Commerce

We also met with online apparel stores Asos and Zalando. These both accept lower margins than H&M currently has, and free shipping and returns are an important component of their customer offering. With its existing product offering, Asos presents 4,000 new products to its customers every week, and it could never have achieved this in a physical store. Mobile apps are important, not only as a catalogue but also as an interactive tool that helps customers to understand what suits them. It is difficult to reach any conclusion other than that H&M is lagging behind and will face major challenges. Despite this, the fund has bought H&M shares as a trade – if the weather is simply normal and currencies stabilise, there are good prospects of H&M's growth and margins improving in 2017. The company will face very easy comparative figures for its sales during 2017.

Telecoms

The telecom sector has been one of the weakest in Europe this year, and has underperformed index by around 15%. The Nordic stocks have fared slightly better and have performed similarly to each other, with the exception of ComHem and TDC which were stronger.

This state of affairs is not due to weak profit growth, which has historically been the case in telecoms, but rather to lower expectations for the various themes dominating and driving the sector in recent years. These themes have been primarily consolidation and data monetisation – drivers that we have long been sceptical about.

Consolidation is something that has partly happened in the sector, but the positive market effects have mostly failed to materialise – something that has been visible in this sector if we look further back in time. In addition, several anticipated consolidations have been blocked or watered down by a more hawkish stance from the European Commission.

Data monetisation is a catchphrase that simply refers to attempts by operators to obtain higher revenues when customers use more data on their phones. This has failed to happen in most cases since, as we pointed out above, network capacity is increasing so rapidly that the competitive dynamic is for customers to be offered more and more data for the same monthly charge or lower. Meanwhile, revenues have remained under pressure from lower interconnection and roaming charges. In other words, a nice situation for us consumers but all the more difficult for operators forced to regularly cut costs.

As we pointed out above, however, the operators have turned the trend. After several years of declining mobile revenues a stabilisation was achieved in Europe in the past quarter, and the market's profit expectations were also exceeded across the board.

So what is the problem now? Of course there are always new worries to agonise over, and right now these are mainly rising interest rates after the election outcome in the United States, the abolition of roaming charges in the EU next year, and potentially higher investment requirements for fibre connections coming from the political direction.

We are most concerned about the interest rate environment and, to some extent, the issue of roaming, but we believe all these issues are manageable and that the sector is starting to become attractive for investment – perhaps especially in some Nordic names.

We would particularly like to highlight a new holding in the fund – Finnish operator DNA, which joined the stock market at the end of November and which we believe is valued really attractively. Finland is a unique market for telecoms. It has not always been a favourable market but it has a listed telecom company that is a diamond in the dunghill of this sector - Elisa. Elisa has succeeded by pursuing a coherent and focused strategy in only two countries (Finland and Estonia), with continuous improvement efforts and all cash flow returned to shareholders. In recent years, the stock has also been boosted by the Finnish market improving radically, and it is one of the few markets in which data monetisation works.

If we then look at DNA we see it is almost a copy of Elisa, growing rapidly with improved profitability in the favourable Finnish market and also traded at a substantial discount to its successful peer. Elisa itself has no premium valuation to the sector, which is a common misunderstanding, and DNA is valued lower – we expect it to rapidly approach a cash flow based P/E multiple of 10-11, which is low for the sector – especially for a quality company that also has limited debt.

Important Information
Investments in fund units are associated with risk. Past performance is no guarantee of future returns. The money invested in a fund can increase and decrease in value and it is not certain that you will get back the full amount invested. No consideration is given to inflation. The Catella Balanserad, Catella Credit Opportunity and Catella Hedgefond funds are special funds under the Swedish Alternative Investment Fund Managers Act (SFS 2013:561) (AIFM). Catella Reavinstfond and Catella Småbolagsfond may use derivatives, and the value of the funds may vary significantly over time. The value of Catella Sverige Index may vary significantly over time. Catella Avkastningsfond may use derivatives and may have a larger proportion of the fund invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other mutual funds, in accordance with Chapter 5, Article 8 of the Swedish Investment Funds Act (SFS 2004:46). Catella Nordic Long Short Equity and Catella Nordic Corporate Bond Flex may use derivatives and may have a greater proportion of the funds invested in bonds and other debt instruments issued by individual national and local authorities and within the EEA than other mutual funds. For more details, complete prospectuses, key investor information, and annual and half-yearly reports, please refer to our website at catella.se/fonder or phone +46 8 614 25 00.