Haven Search Amid Virus Leads to Telco Stocks, Citi Says

(Bloomberg) -- Investors on the hunt for havens in Asia’s equity markets should consider telecommunications stocks, according to Citigroup Inc.

“Telcos present a good hedge as it offers one of the lowest correlations between GDP growth to Ebit growth at 0.2 times,” Arthur Pineda, an analyst with the U.S. bank, wrote in a note Tuesday. “This compares against 0.5 times correlation for the MSCI Asia Pacific Index.”

Fears over the economic impact of the coronavirus have sent equities and bond yields plunging, leading to emergency measures including a Federal Reserve rate cut. Now more stimulus may come, and the falling U.S. 10-year Treasury rate is raising the “yield play attractiveness” of the telecom space, after their shares suffered during the monetary tightening of the past two years, Pineda said.

Top picks include PT XL Axiata in Indonesia, Singapore Telecommunications Ltd. and South Korea’s LG Uplus Corp., as well as telecom-infrastructure firms NetLink NBN Trust, PT Sarana Menara Nusantara and Comsys Holdings Corp. All offer some combination of firm yields and secure forward earnings growth, Pineda said.

There are also some fundamental reasons for the relative stability in telecom stocks. The biggest markets in the region, including Japan, Hong Kong, Singapore, South Korea, China and Taiwan, see the majority of their revenue locked into less-volatile monthly contracts, leading to less variability, according to a note published on March 4.

Even countries where pre-paid services are more popular, such as Indonesia, India and Thailand, the sector is unlikely to see significantly more volatility in revenue, it said.

“Historically, the impact of economic slowdown on even pre-paid markets hasn’t been material given the low correlation with operating income for these markets,” Pineda said. “This may be linked to relatively inelastic demand for communications products.”

To contact the reporter on this story: Eric Lam in Hong Kong at elam87@bloomberg.net

To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Cecile Vannucci, Min Jeong Lee

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