Bank of America Securities-Merrill Lynch Research downgraded the European telecoms sector to neutral from overweight, saying the sector's relative earnings momentum is likely to lag that of sectors more geared into a recovering economy.

The brokerage said it will be hard for the sector to see catalysts for outperformance over the near-to-medium term.

However, telecoms-sector valuations remain extremely attractive, with 2009 and 2010 dividend yields estimated to be the highest of any sector, it said adding that for this reason alone, many investors will want to own the sector.

In our scorecard valuation ranking, the sector remains ranked cheapest of all. Despite the downgrade, telecoms remains our favourite defensive sector, the brokerage said. (Reporting by Kumar Alagappan in Bangalore; Editing by Vinu Pilakkott)

Merrill Lynch Telecoms