Credit Crunch 8: Show us your Labs

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This is the eighth and latest in our acclaimed series on the global financial crisis. With estimates of losses in the value of financial assets in 2008 now at $50 trillion (c.70% of global GDP), and financial stress and unemployment rising, our previous interpretations of the prospects for telcos in the financial crisis seem open to challenge as being overly optimistic.

However, there is little evidence from company results of an impending crisis in demand for telco services, at least for now. Accordingly, telecom sector relative performance continues to be strong, particularly during the worst of the market downdraft. However, investors appear to be increasingly selective in defining what differentiates one telco from the next. Our attendance at a recent telco innovation conference leaves us convinced that there is a story waiting to be told around research and innovation - if the pieces can be properly aligned.

Our analyst writes this while enduring the pain of a swollen jaw, traumatized earlier as it fell, in shock, to hit the desk from which he types. All this pain could have been avoided had he only not looked at the offending headline on my Bloomberg screen - that a new study by the Asian Development Bank estimates total losses in the value of financial assets worldwide during 2008 at $50 trillion. It's noteworthy that the "trillion" value has historically been so seldom-used (outside astronomy) that there isn't really a familiar,user-friendly abbreviation; but it's still early days, as any Zimbabwean will tell you.

The ADB reckons that the portion of the $50 trillion in losses attributable to developing Asia, at $9.6 trillion, is greater than the entire region's GDP in 2008. We in the developed world may take small comfort in our relatively more robust economic and political institutions - the $50 trillion global figure works out at 70% of the estimated purchasing power parity (PPP) adjusted GDP figure for the entire world according to the 2008 CIA World Factbook, $71 trillion.

We wrote recently elsewhere that, apart from the appalling implications for individuals in the current crisis, there is an aspect of this which is perversely exhilarating, as arguably all of (or the vast majority of) humanity collectively faces a common challenge. Not that humanity will collectively see it that way - our analyst would expect quite the opposite in practice, with nationalism and protectionism as sadly natural safety blankets to turn to in times of crisis. Nevertheless, if the ADB study's numbers are anywhere near correct, then our assumption has been broadly vindicated: the majority of the planet's working men, women, and (sadly) children slaved away during 2008, only to see the fruits of 8.5 months of their labor obliterated by the implosion of global asset values. The lucky ones may continue, while many now face unemployment and uncertainty.

Clearly it is no secret that conditions have grown breathtakingly worse since our relatively more upbeat assessment of what was once called the credit crunch, some six months ago. As one might expect in a period of such intense anxiety, anecdotal evidence of belt-tightening is easy to find. Yet, when asked in a more structured framework, it appears that two-thirds of telco customers would look to cut-back on, rather than cut, services. We thus repeat our Telco 2.0 mantra that the telco should sell itself through the downturn on the basis of good value for money, access to critical information, and affordable entertainment - it looks like most of your customers have reached the same conclusion.

The market also seems to have solidified its view, for now at least, of telecom as a relative defensive. In our re-worked ranked returns chart for the benchmark STOXX 600 index industry groups, we present a ranking by one month performance to 9th March (in red) with year-to-date performance included for reference (in blue). It's important to note that the one month decline to 9th March in the benchmark is 20.8%, and the year-to-date decline is 20.4%. As we have previously expected, telecom is indeed performing better during periods of market stress (we think -21% qualifies) than during more benign periods (in this case telecom ranks eighth through the up/down volatility period, and third during the falling-off-a-cliff phase).

DJ STOXX 600 Rankings By Sector, 9 March 2009 vs YTD

The market may be putting its money where its mouth is, but do recent company results give us any tangible evidence of the resilience of these businesses during this crisis? Interestingly, given cable's assumed position as a victim of consumer downsizing, we find encouraging signs in a couple of fourth quarter reports from European cable operators.

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