Telecom Europe (TEL) : finally waking up!

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 19 main European stocks in the sector. It should be noted that non-euro area stocks represent 45% of the index, 30% 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 € 50m. 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 19 large European telecom stocks with characteristics of being mainly English and German (50% of the index).

These are mainly 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 20% 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 drop of nearly -7% against -4.5% for stoxx600NR.

The largest weighting of the index, Vodafone, lost 30% since the beginning of the year due to market doubts about the payment of the dividend (which has just been confirmed by the company in its Q3 release) while Telecom Italia (-28% ) does not do much better, penalized by his governance problems and his Italian flag. 4G / then 5G and fiber are expected to play an important role in refocusing the sector in  growth for the medium term, but in the short term, there is a lack of growth drivers.

However, declining markets make the sector more attractive because of its lack of cyclicality and its high yields. The relative performance of the sector has improved significantly in recent weeks.