The telecommunications sector has been overshadowed by the broader technology market over the past decade and has thus brought little return to investors. We believe that this will change soon. The problem of the telecommunications market is the strict regulation that has forced four companies in most Western markets to build networks and compete for customers. In such a market structure, price competition becomes too irrational and networks are poorly utilized, resulting in a low return on investment. This situation will soon change with the next generation of mobile networks, 5G. In the U.S., regulators have approved a merger between the number 3 and 4 companies in the market, T-Mobile and Sprint, resulting in a market with three players. The reason for approving such a merger, was to increase the return on investment in this sub-sector, which in turn will encourage companies to invest in improved networks and 5G. We believe that similar mergers will take place in Europe, especially after the Covid-19-virus has opened the eyes of regulators to the weaknesses of exiting networks. Any improvement in the current market structure will have a positive impact on equities in a sector that, despite healthy financial ratios, is trading at only 13 times the expected future profits.
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