Five Things to Watch in European Tech, Media and Telecom in 2020

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European technology stocks are set to end 2019 with their biggest gain since the dot-com bubble, the 35% advance thus far setting a high bar to continue the rally in 2020.

Key themes in the sector next year will be the expected recovery in the semiconductor inventory cycle, potentially aided by the launch of new Apple Inc. iPhones with 5G capability.

While media and telecom stocks have not done as well as tech this year -- up about 15% and 1.8% respectively -- there will be no shortage of important events in 2020 as carriers seek to lighten their balance sheets ahead of the 5G network roll-out and media firms are set for more dealmaking.

New Chapter for Chips

After European chip stocks strongly rebounded from a trade war-driven rout at the end of 2018, an agreement for a partial trade deal between the U.S. and China could further boost the sector. Investors are also hoping that demand will pick up with an upturn in the industry cycle as inventories have begun to clear.

“We’ll be pretty bullish on the sector,” said Marcus Morris-Eyton, a portfolio manager at Allianz Global Investors, in a phone interview. “The risk is clearly what happens with the trade war, but I think ultimately the structural drivers are still in place and the inventory correction is over.”

The success of Apple’s new iPhones, which analysts are hoping will be able to connect to 5G networks, will also be crucial for chips in 2020. Toward the all-important holiday season, component suppliers into the Apple supply chain will be ones to watch, including STMicroelectronics NV, Dialog Semiconductor Plc and light-sensor maker AMS AG, whose 73% drop in 2018 has been partially offset by a gain of similar magnitude this year.

Getting Into Gear

Speaking of 5G, Ericsson AB and Nokia Oyj have come into focus as potential alternatives to Huawei Technologies Co. as the Chinese firm has been hit with sanctions and network restrictions in a global tech feud.

However, the two European firms have much to prove in 2020 given the worries that Nokia’s technology is lagging rivals, while Ericsson’s stock has struggled to reach mid-year highs again after an earnings miss, which came with a warning that its 5G roll-out in Asia would weigh on profit.

One believer in Nokia is Chris Hiorns, manager of the Amity European Fund at EdenTree Investment Management, who added to his position after the firm’s recent profit warning.

“Longer-term they are in a strong competitive position, and I think that the market reaction to Nokia’s profit warning was overdone,” Hiorns said in a phone interview. He also owns Ericsson stock.

Tower Deals

The expense of rolling out the next generation of networks has prompted some telecom operators to look at offloading assets -- Altice Europe NV’s fiber deal and Telefonica SA’s reorganization are prime examples where reducing debt is a priority. It’s notable that Spain’s Cellnex Telecom SA is the Stoxx 600 Telecom Index’s second-best gainer this year as the tower company snaps up assets from the likes of Orange SA, Arqiva and Iliad SA.

Spinning out the infrastructure assets may become a catalyst for the sector that’s out of favor and looks cheap, Alasdair McKinnon, lead manager of the Scottish Investment Trust, said in a phone interview. In addition, “if the market does go down, well actually people will be falling over themselves to find reasons to look at these stocks.”

Telecom companies are also teaming up with one another to reduce network construction costs, such as in the collaboration between Vodafone Group Plc and Telecom Italia SpA, and Germany’s top phone carriers. The creation of separate tower companies, like Vodafone is planning, is another option. 5G has already launched in seven European markets, according to New Street Research, and upcoming auctions in France and the U.K. are due next year.

Media M&A

Dealmaking has really fired up this year among media stocks and JPMorgan expects to see more deals in 2020, following Peppa Pig-owner Entertainment One Ltd.’s sale to Hasbro Inc. and the private equity deal for Scout24 AG’s auto unit agreed earlier this week.

“M&A has started in the space and will continue, we believe, given low interest rates, low growth, FX, and attractive valuations,” JPMorgan said, highlighting sub-sectors such as online classifieds, online takeaway firms, content and free-to-air broadcasting.

Other deals to keep watching include Prosus NV and Takeaway.com NV‘s battle for U.K. online food delivery company Just Eat Plc and moves by Mediaset SpA to merge its Italian and Spanish units into a new Dutch holding company. Watch this space as Mediaset’s feud with shareholder Vivendi SA has been making progress tricky.

Satellite Fight

Satellite stocks were among the worst performers on the Stoxx 600 Media Index this year, with SES SA slumping 24% and Eutelsat Communications down 14%. SES and its U.S.-listed peer Intelsat SA have been deflated by the U.S. regulator rejecting their plan to raise billions of dollars by selling airwaves in a private sale, calling instead for a public auction.

Last week a bill was approved that would limit how much the two companies can make from the auction. Investors will be looking for further details from Federal Communications Commission Chairman Ajit Pai regarding his plan for the sale, which could come before a vote at the FCC’s Jan. 30 meeting.

--With assistance from Michael Msika and James Cone.

To contact the reporter on this story: Kit Rees in London at krees1@bloomberg.net

To contact the editors responsible for this story: Celeste Perri at cperri@bloomberg.net, Kasper Viita, Beth Mellor

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