The Canadian communications sector has been humming along this year, enjoying its highest return year to date since 2011. Anthony Okolie speaks with Andriy Yastreb, Telecom and Media Analyst, TD Asset Management, about whether the sector can continue the growth momentum in 2021.
- The communications sector in Canada, which has lagged the TSX composite index in previous years, has so far been performing well against a broad index year to date. Take a look at this next chart. It compares the communications sector to the TSX. Andriy, the Canadian communications sector is up over 17% year to date, which would be the highest return for the sector since 2011. Can the sector continue to perform well against the TSX?
- Anthony, yes, I believe so. I think if you look historically since 2012 at total return for the sector, which is TSX, what's interesting about the chart is that both sector and TSX are doing exactly 10% on average since 2012, including the year to date results. And what it means is that from historical perspective, from long-term perspective, the sector is able to keep up with TSX.
- And do you see more upside for the sector going forward?
- Yes, I believe there is upside if you look at fundamentals of the sector, and there's several drivers for that. First of all, for Q2 results this year, we will be overtaking COVID impact. So what it means to that revenue will start to accelerate from year on year perspective. And as we go through the rest of the year, and borders reopen, and people start traveling and roaming revenue comes back, then wireless will continue to accelerate, fundamentals should start to improve from here.
And the second point is that Canadian telecom regulators, the CRTC, recently made two large announcements, one regarding a wholesale broadband pricing and, second, about wireless virtual mobile operators. And the bottom line of those two decisions is that the regulator decided to focus on companies-- on the companies in the industry investing in more infrastructure versus focusing on promoting price competition, which is a positive for the industry. And the final factor here is that as we go over next several weeks, there's a bit of an overhang for the sector because right now there is a spectrum auction that is ongoing and there is a risk that companies will spend too much for spectrum that is critical for 5G. So from that perspective, as we get the decision of the-- or the outcome of spectrum auction over the next several weeks, that uncertainty will be removed and after that, investors will focus more on fundamentals of the sector which, as I discussed, are improving.
- OK. So what's the most likely scenario in which the communications sector might underperform versus the index?
- If you look historically, TSX usually underperforms versus the index when TSX composite is performing really well. So whenever the annual return for TSX composite it's over 20%, usually communications sector lags behind a little bit. So from that perspective, if we continue to see commodities performing better and if you see economic recovery that continues to drive banks, and industrials, and some of the cyclical industries higher, then potentially it will be harder for communication sector to keep up. But having said that, both TSX and communication sector are up 17% year to date. And as I mentioned, there are some fundamental drivers that will help the sector to continue to perform well. So from that perspective, here at TDAM, I think we remain positive on communication sector.
- Andriy, thank you very much for your insights.
- Thank you so much, Anthony.