Communications Services was the largest change in sector classification late last year. The higher profile US sector stole the headlines, courtesy of several FAANG companies. The changes made by MSCI in their European Communications index, on 3 December 2018, resulted in the addition of media and entertainment companies (such as advertising, broadcasting and publishing businesses) to national fixed-line telecom companies and mobile telecom providers.
These telecom businesses have struggled amid tight competition, which has cut margins, and the need for significant capital expenditure on networks, which has hampered cashflows. More recently, cost concerns have focused on the large bill for securing 5G spectrum. These challenges have led the sector to underperform.
While 5G remains a cost story amid further spectrum auctions this year and into next, the pressures described above should now be reflected in discounted valuations. Looking further out, 5G could bring more business opportunities. For now, with investors looking for less crowded, defensive, inexpensive opportunities, the European Communications sector looks interesting.
Remind Me About 5G
5G, or ‘fifth generation,’ mobile networks will provide a superior service to mobile telephone consumers. The capabilities of 5G include:
- Improved broadband speeds, which will allow consumers rapid access to high quality entertainment and information.
- The creation of new applications, such as remote surgery, wireless IT infrastructure, avionics and onboard entertainment aboard commercial aircraft.
- Greater capacity, provided by efficient use of the available resources (i.e. spectrum and network equipment) and could be utilised by a wide cross-section of industries, including automotive, manufacturing, healthcare and transportation.
- Higher responsiveness (ultra-low latency), resulting in the ability to respond quickly to data download requests. This differentiates 5G from previous generations of wireless, as well as parallel technologies such as satellite and cable broadband.
Among the business opportunities, these benefits of broadband wireless will give first-time access to mission-critical services (i.e. new users) and enable Internet of Things on a revolutionary scale.