Can telecoms stocks provide a haven during the coronavirus crash?
TV, broadband and phone services have never been so important to people as they remain at home amid the coronavirus lockdown. Could this make companies like BT Group and Vodafone possible havens for investors?
Broadband, phone and TV are more important than ever
The UK is officially in lockdown as the country tries to limit the spread of coronavirus. Europe has become the new epicentre of the outbreak and the UK is following in the footsteps of its neighbours, including France, Italy and Spain, as the region tries to get a grip on the situation.
This means people in the UK have been ordered to stay at home and are only allowed to leave for a handful of reasons. This includes shopping for necessities like food and medicine, exercising, or caring for older and vulnerable people. Key workers can also still travel for work purposes.
The UK government has said the measures will be in place for at least three weeks, when it intends to review the situation, but we know people will be spending an unusually large proportion of their day cooped up inside. Ultimately, people are having to rely more on phone calls to stay in touch, television to be entertained, and broadband for both work and play. Everyone who feasibly can must work from home, and the majority that can’t are also being told to stay put. Schools are shut and people are now facing the challenge of educating their kids at home, and they are having to socialise through phone calls and social media rather than in person. Anyone that chooses not to abide by the lockdown have nowhere to go as shops selling non-essential goods, like clothing or electronics, have been told to shut, as have leisure facilities like cinemas, pubs and even parks.
The telecoms industry is therefore providing a critical service to countries in lockdown by keeping us all connected to the outside world – whether by allowing us to contact friends and family, shop online, work from home, keeping the kids busy, or binge-watching programmes.
The challenge is providing a good service
The main challenge for telecoms companies is meeting the surge in demand for services. There have been concerns over whether there is the capacity that will be needed after companies such as Netflix, Alphabet's YouTube and Amazon said they were slowing down the speed and lowering the quality of their streaming services after being asked by the European Union to free up space on the network.
‘Last week, the European Union asked companies like Netflix, Amazon and YouTube to ensure that we are using telecommunications networks as efficiently as possible given the unprecedented demand they are facing,’ Netflix said. ‘We immediately developed, tested and deployed a way to reduce Netflix’s traffic on these networks by 25% - starting with Italy and Spain, which were experiencing the biggest impact. Within 48 hours, we’d hit that goal and we’re now deploying this across the rest of Europe and the UK.’
However, internet service providers in the UK have strongly denied the network will be under strain as a result of people staying at home.
BT Group, which manages the UK’s Openreach broadband network, has said it can comfortably accommodate everyone’s digital activities. It ‘overbuilds’ its network to ensure it can handle spikes in demand, such as in the evenings or when sporting events are being streamed, so it has ‘a lot of headroom’ to utilise. BT says the highest peak it has ever had to deal with was 17.5 terabytes per second (tbps).
On 20 March, BT said it had seen daytime traffic rise by 35% to 60% as more people started to work from home and that its network peaked at 7.5tbps. That compares to a usual daytime average of 5tbps. There is little doubt that the daily average will rise considerably more than now the UK is officially in lockdown. Still, BT is confident it has the capacity needed to meet everyone’s needs.
‘These facts give us confidence that the additional load on the broadband network is well within manageable limits and we have plenty of headroom for it to grow still further,’ BT said.
BT says the situation has also changed how the network is used and that it is monitoring the situation closely. For example, mobile traffic data is being more evenly distributed around the UK as people stop commuting into densely populated cities, and that roaming data traffic has fallen dramatically as more people use WiFi.
Others are also confident in their ability to keep the country’s telecoms network up and running. ‘COVID-19 is already having a significant impact on our services and placing a greater demand on our network. We should expect this trend of data growth to continue and we have already seen data traffic increase by 50% in some markets. Our technology teams throughout Europe have been focusing on capacity across our networks to make sure they are resilient and can absorb any new usage patterns arising as more people start working from home,’ Vodafone said on 20 March.
TalkTalk has also said it is ‘well prepared’ after reporting a 20% surge in demand last week.
Packaged deals could struggle and customers could change their priorities
The global telecoms industry has been pursuing similar strategies based around ‘convergence’ over recent years, and this is only accelerating. This involves selling multiple services to customers, such as TV, broadband and mobile, under bundled deals. Customers tend to be more loyal and stay with their providers for longer compared to when they purchase a single service.
For some, the coronavirus poses a problem for certain aspects of their bundles. For example, the cancellation of major sporting events around the world has left channels such as BT Sport and Sky Sports virtually redundant for the foreseeable future, which means both have lost one of their strongest selling points when trying to attract customers. Both companies have had to offer customers the chance to ‘pause’ their subscriptions to sporting channels in the meantime. Other aspects of TV could also be impacted as studios shut down and filming of new content is halted.
Plus, if lockdown measures have to remain in place for a prolonged period of time it could be enough to change people’s priorities when their contracts expire, and they start looking for new deals. For example, people may opt for shorter mobile contracts with less data because they are constantly using WiFi.
But it could speed up the adoption of faster connectivity
Telecoms companies have been investing billions in 5G and superfast full-fibre broadband and, although both are in their infancy, the need for faster connectivity has never been greater. However, there is debate over whether the coronavirus will see their introduction slow down or speed up. The rollout could be hampered over the short term because of reduced supply of parts or a lack of labour amid the lockdown measures, but the crisis is likely to accelerate their introduction over the coming years as the crisis highlights the critical importance of fast connectivity.
China’s IT Ministry has called for the country to accelerate the construction of the 5G network in order to minimise the impact of the coronavirus, and others like Norway have also implied that they need 5G sooner rather than later. Linda Hofstad Helleland, Norway’s minister of regional development and digitalisation, implied the country’s 5G plans will not be hindered as Telenor launched its 5G networks in several towns and cities earlier this month. ‘Given the current situation in Norway, we see how important the digital infrastructure is for those quarantined and those working from home. The new 5G network will provide better mobile coverage and gradually better access to broadband across the country, which will reduce the vulnerability of an increasingly digitised society,’ she said.
The telecoms industry may struggle to continue building the infrastructure needed to bring faster connectivity over the short term, but the coronavirus outbreak underlines the importance new technologies like 5G and full-fibre broadband play in modern-day life.
Telecoms stocks shows signs of resilience as coronavirus spreads
The coronavirus has caused markets to crash and made them extremely volatile. No sector is immune from the outbreak but there are pockets of resilience emerging, and telecoms could be one of them. Both BT and Vodafone have lost value over the last month, but less than the rest of the blue-chip index. The FTSE 100 has lost nearly 15% over the last month while both BT Group and Vodafone have edged down 12%.
UK share prices are likely to remain under pressure as the outbreak keeps society in lockdown, so investors must find safe havens for to protect their portfolios in the meantime. Many companies are either unprepared or unable to adapt to the situation unfolding before us and having to take unprecedented action to conserve cash and bunker down. Some have suspended their dividend until there is greater clarity, posing questions over the safety of shareholder returns in the immediate future. For others, the question is whether they will be able to survive the outbreak at all.
With this in mind, telecoms companies are a relatively safer bet for investors right now. Their services will remain key for people until the virus is under control and their ability to generate cashflow should be much better than most other sectors this year. The sector’s dividends are far from guaranteed but it is in a better position to maintain payouts than most other blue-chip stocks.
The ability to weather the storm over the short term twinned with the positive fundamentals built around 5G and full-fibre broadband means telecoms stocks should be on the radar of investors – and the temporary weakness in their share prices could provide a cheaper entry point for those seeking value over the long term.
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