Nokia Oyj's and Ericsson AB's quarterly earnings reports this week will help determine whether Europe's stock markets can resume their fourth-quarter rally, investors said.
The Dow Jones Stoxx 600 Index, which tracks companies valued at 4.53 trillion euros (US$4 trillion), has dropped 3 percent this year. The decline came as investors reappraised gains that sent the index as much as 27 percent higher from the three-year low set on Sept. 21.
In addition to the Scandinavian mobile phone makers, SAP AG, Infineon Technologies AG, STMicroelectronics NV and Siemens AG will also release quarterly reports this week.
"These are extremely important in this phase of the market recovery," said Ollipekka Elovainio, who helps oversee more than 6 billion euros at Nordea Investment Management in Helsinki.
Elovainio holdings in Nokia and Ericsson shares match those in his benchmark index and he's not planning to increase investments.
Recent reports haven't been encouraging for phone-equipment investors. Nortel Networks Corp, North America's No. 2 maker of phone gear, and RF Micro Devices Inc, a US-based maker of chips used by Nokia, said last week current quarter sales will fall short of analysts' expectations.
Perlos Oyj of Finland and the Germany company Balda AG, which also supply components to Ericsson and Nokia, also said sales missed or are likely to miss forecasts.
"Comments from companies like Perlos suggest that either [handset] sale volumes have been lower than anticipated or there have been delays bringing out new phones,'' said Nordea's Elovainio.
The Stoxx 600 index 1.5 percent lower last week, its second consecutive weekly loss, as investors cut their holdings in the technology shares that have surged in the last four months.
Ericsson, Nokia and ARM Holdings Plc, Europe's No. 1 designer of semiconductors, lost 12 percent or more this year. They had gained over 30 percent in the last four months.
"Everyone's scared to take big positions because it's so unclear whether the run-up in the market is justified," said Pieter Spierings, who helps manage 7 billion euros (US$6.3 billion) at Kempen & Co. He sold Nokia shares at the end of last year and has been avoiding Ericsson for more than a year.
Analysts' forecasts for this year's earnings at European technology companies have been cut by 8.9 percent in the last month and by 34 percent in the last three months, according to Thomson Financial.
That makes STMicroelectronics, Europe's largest chipmaker, Cap Gemini SA, Europe's biggest computer services company, and rivals look even more expensive.
STMicroelectronics trades for 41 times earnings, the highest since September 2000. The average share in the Dow Jones Stoxx 50 Index changes hands for 25 times profit.
"There are still very stretched valuations in some areas of technology," said Alex Scott, senior research analyst at 7 Investment Management in the UK.
Nokia, which reports fourth-quarter earnings on Thursday, said in December it expects earnings per share to be "at the upper end or even above" a range of US$0.18 to US$0.20. Its shares fell 4.3 percent last week to 25.45 euros. The largest handset maker has risen 51 percent since Sept. 21.
Ericsson expects fourth quarter sales of 55 billion Swedish kronor (US$5 billion), excluding the mobile-phone business transferred to its venture with Sony Corp. That's little changed from the previous quarter.
The No.1 phone-equipment maker, which releases fourth-quarter figures on Friday, has jumped 41 percent in the last four months.
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