Why there could be worse to come for the telco sector


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The Telecommunications Sector (XTJ) is down 16.3% this year and the sector is looking worse for wear.

The $15 billion proposed merger between TPG and Vodafone to challenge the giants Telstra and Optus was flagged by the Australian Competition and Consumer Commission (ACCC) last week because it fears shrinking competition in the mobile sector could ultimately leave consumers worse off.

This raised concerns among investors.

tpg vodafone telco telstra optus

TPG Telecom (ASX: TPM) shares fell 17.85% to $6.35 after this news. Since then the shares have traded back up to above $6.60 as the stock struggles to find support.

We were not surprised to see TPM shares fall on this news and we initially expected TPM to fall back and fill the gap at around the $6.00-6.20 price. This news has simply accelerated this move down.

Telstra shares fell 5.3% at open on this news as telco investors speculated that the merger could be blocked, ultimately resulting in more competition for Telstra in pricing and service offerings.

Down 17.21% this year it's been a rough year for Telstra shareholders. The thing with Telstra that is important to know is it often disappoints the market.

Whilst things were initially looking up for some time, there's nothing exciting happening with Telstra to signal a buy right now.

The announcement of the 20 new 5G towers were on target was as expected and nothing to be too excited about.

What's interesting is that our telecommunication sector moves similarly with the US and in the past month US telco stocks have taken a turn and are looking bearish. I expect our telecommunications sector will follow.

That being said, there will be good opportunities to trade telecom stocks over the medium term into 2019.

For Telstra to indicate a turn and potential bullish run we need to see an increase in buyer momentum behind the stock and see the stock rise above $3.09 a share.

Telstra still has a lot to prove and the timing is just not right at this point. We would rate Telstra as a stock to watch for now.

As for TPM it is a sell, we expect the stock to continue to fall to around $6.00-6.20.

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