Telecom Europe (TEL) : Very weak

The Lyxor TEL ETF (UCITS) was created in 08/2006 , is listed in Euro on Euronext and tracks the Stoxx600 Telecom Europe index, which is composed of the 20 main European stocks in the sector. It should be noted that non-euro area stocks represent 45% of the index, 31% of which is in sterling, which represents a potentially significant volatility factor for the index.

The cost of this ETF is 0.3% in the average of our selection and the AUM  is approximately € 67m. The replication method is indirect (via a swap) and the distribution method is by capitalization.

Alternative ETFs:  EXV2 ( iShares in Euro), CT5 ( Amundi in Euro), TELW ( Lyxor in GBP)

 

Index & components

The TEL (Lyxor) tracker allows investors to access a basket of 20 large European telecom stocks with characteristics of being mainly English and German (49% of the sample).

These are very large market capitalisations (between € 10 and € 80bn), which have a turnover consisting mostly of a strong local base with defensive characteristics but with intense competition that drives prices, capital intensity due to investments in fixed and mobile networks. It should also be noted that Vodafone, which represents 21% of the index, is a company that has become highly internationalized and pursues a double strategy as a cable operator and world leader in mobile.

European companies have generally stabilized their dividend payments thanks to a greater control of their cash flows through the control of Investments and especially the reduction of operating expenses. The payment of high dividends (about 4% yield) is an attribute of the sector that makes a large part of its attractiveness on the stock market. The major European operators have invested heavily in optical fiber and content in order to eventually have greater control over selling prices. Telecoms are an area where there is good medium-term visibility (no rupture or "uberisation" on the horizon), the players in place have already sharply lowered the price of subscriptions.

The currency risk exists because of the high proportion of UK stocks in the index, and therefore mainly focus on the € / £ parity. The volatility of this index has historically been fairly moderate, but has tended to increase in recent years as a result of price pressure, the halt of dividends payment by certain companies (eg Telecom Italia) and too high leverage.

 

Latest developments

In 2017, the TEL tracker was stable but markedly underperforming the Stoxx600 NR (+ 10.6%).

Since the beginning of 2018 the sector has recorded a sharp decline of -8.6%. The sector lacks catalysts on the rise because of almost zero profit growth and while the high yield makes it a proxy bond in a period of reflation. So the sector behaves pretty much like the state bonds.

The telecom sector is currently cheap at around 13x 2018 earnings, 4G / then 5G and fiber will play a significant role in the reflation of the futures sector, but in the short term, there is no bullish catalyst, and the market is much more focused on growth stocks and cyclicals to play the economic downturn in Europe. The decline in the pound has also had a strong negative impact that continues in recent weeks, and the English values ​​are rather under pressure (Vodafone: -20% and British Telecom: -19% since January).

There is no real positive catalyst to wait in the short term on the sector.