Before we start to look at top prospects for the second half of the year, let's take a look back at the last 12 months and work out why the S&P/ASX 200 Communications (ASX: XTJ) index was the best performing sector on the market.
How did the Communications sector perform in FY19?
The Telecommunications index posted a return of 34.6% for the 2019 financial year by my calculations (2 July – 30 June), which is impressive given the average return across the 11 major sector indices was just 9.4% for the year.
Arguably, the Telecommunications sector benefitted by its limited number of constituents, which are heavily tilted towards the performance of big-name players such as Telstra Corporation Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM).
Telecommunications was one of the few sectors that was able to post positive returns during the downturn in domestic equities we saw in the second half of last year.
This was largely due to the TPG share price rocketing 66% higher in August on the proposed merger with Vodafone via Hutchinson Telecommunications (Aus) Ltd (ASX: HTA), which was subsequently scuppered by the ACCC this year.
The 12-month index performance has also been helped by share price increases for the likes of Telstra (+46.4%) and Vocus Group Ltd (ASX: VOC), which saw its share price soar 42.2% during the period.
What's the 6-month outlook for Telecommunications?
While the Telecommunications sector has performed strongly for investors in the last 12 months, it hasn't been all smooth sailing as rising competition fears and the ever-present NBN both presenting challenges.
The decision by TPG to abandon its 5G network plans and subsequent ACCC rejection of its merger proposal threw a spanner in the works, and one which I think could benefit Telstra as it looks to reassert its dominance in the sector.
5G is looming as the next major battleground and the government's decision to ban the use of Huawei network equipment has certainly created some unexpected barriers for the big players to consider in their operations.
Overall, I think it will be those companies who can work around these challenges and executive their network strategy quickly and effectively that will stand to benefit in the longer-term.
