Don't panic! Telco shares rally! We're all doomed! Not.

Of course, and as we in this industry know only too well, what goes around comes around - but the current upsurge is taking place despite, and in the face of, arguments from sceptics within the analyst community who say there is no basis for the sudden enthusiasm and that we are once more witnessing irrational exuberance.

The MSCI World Index is a stock market index of 1,500 so-called "world" shares that is calculated and maintained by MSCI Inc. (the new name of the formerly rather better known Morgan Stanley Capital International) and is used, particularly in North America, Western Europe and parts of the Far East as a common benchmark for global stock funds.

The Index comprises a basket of shares from the world's developed markets - but as defined by MSCI itself. It includes securities from 24 countries but excludes stocks from emerging and "frontier" economies which actually makes it rather less of a truly representative worldwide index than its publisher would have us all think it is. Remember this is capitalism writ large and Adam Smith's "hidden hand of self-interest" is working away behind the scenes.

Nevertheless the MSCI Index is important and influential market indicator and it has been forecasting that telecoms stocks will provide poor returns. However, investors seem not to be fazed by the gloomy prognosis. Thus, Verizon Communications of the US and PCCW of Hong Kong, as well as AT&T (also of the US) and KPN of the Netherlands are amongst those stocks rallying even as another major indicator, the Standard and Poor 500 Index, notes that  telecoms shares are some of the most expensive on the planet and are trading at prices that cannot be sustained given their relationship to forecast performance and profits.

So, what's going on? Well, the MSCI Index measures the performance and share prices of 52 telecoms companies from around the world and both Verizon and PCCW are up by a massive 21 per cent on that Index despite analyst's expectations that the earnings of these two telcos will grow by less than half the rate of other industry sectors in the Index.

However, the US economy is faltering and investors are turning away from corporate debt and bonds, where yields are the lowest they have ever been, and are turning instead to to telecoms shares for a better return.

As Jacob Tusch-Lec of Artemis, a global income fund overseeing some US$16 billion of investment capital says, “I know they [telcos] don’t have earnings growth, but I am not buying them for growth but for their very high, abnormal dividend. If I can see KPN paying 3 per cent on their bond and giving me a dividend yield of 6 per cent, why would I buy the bond?”

And he's right. KPN, the incumbent Dutch operator and the country's biggest telco, is paying a dividend of 6.4 percent. And that's not all, 67 of the companies quoted on the S&P 500 pay dividend yields above the average interest rate on corporate debt and telcos are paying five out of the 10 biggest dividends in American equities and, as a grouping, are yielding 5.44 per cent. Interestingly, and significantly, the second highest payouts (of 4.25 per cent) are coming from utility companies.

As far as individual telcos are concerned, the comparatively small Connecticut, US-headquartered Frontier Communications Corporation currently provides the biggest yield at 8.73 per cent while mighty Verizon, the biggest US mobile operator, is nine places down with a still impressive yield of 5.91 per cent. AT&T is returning 5.93 per cent and PCCW 6.62 per cent.
 
Further evidence for investor enthusiasm is that, in regard to telecoms shares globally, in Q2 both MSC Iand S&P registered their biggest rallies in seven years,  each growing by 19 per cent. This means US telco stocks are trading at 14.8 times their expected profits for next year.

Verizon's share price has risen by 28 per cent in five months and they are changing hands at a multiple of 14.5 times reported income - and this despite analysts forecasts that 2010 will see Verizon posting its biggest reduction in revenues since 2003 - when the world was a very different place.

So are investors displaying irrational exuberance again or are they bolting for a safe haven in stormy times? Well, the stock rises are not simply a US phenomenon. For example, KPN shares were up by 9 per cent at the end of Q2 despite analysts expecting 2010 to be its worst year for profits since 2004.

The last word goes to Masahiko Ejiri, a senior fund manager at Mizuho Asset Management in Tokyo. He says, “First and foremost, most investors are very concerned about the US economy and in that sense it’s reasonable for investors to want safe and high-yield investments, and telecom stocks are a good example.”

It's an ill-wind that blows nobody some good.