Investing in telecoms in emerging economic regions: Where to watch and what to buy

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Fund managers have traditionally used investments in the
telecom sector as a defensive hedge. So while you may not get capital
appreciation by a sharp rise in the stock price, you are almost assured of a
steady dividend yield. Dividend yields of four to five percent are par for the
course.

Telecom companies have two primary sources of revenue:
telephone charges and data usage in mobile broadband. Therefore, rising revenues
and profits are dependent on either a rising consumer base or a rise in usage
patterns. Most developed markets are saturated on both counts and growth of
profits and revenue is nominal.

On the other hand, countries like China, India and parts
of the Middle East and Africa continue to be telecom hotspots, with a steady
rise in both data usage and user base. Rising e-commerce and online B2B trade
is driving data usage patterns. Companies operating in these countries are
turning in a sustained growth rate of eight to ten percent. Let us look at some
of these hotspots more closely:

1. China: The
Chinese telecom market has the largest user base with over one billion mobile
connections, and that figure is rising by about a million new subscribers every
week. The sector is still growing at over six percent on an annual basis. Usage
of 3G and 4G services account for over 50 percent of average billing, and data
growth is gaining traction from a maturing value chain and pricing. China
Telecom and China Unicom are two large regional players.

2. India:
Telecom services and connectivity are essential for the economic development of
a country. With 1.25 billion people, India is the second largest telecom market,
with a subscriber base of just under a billion users. Penetration of mobile Internet
is low at 20 percent, but the figure is set to rise four-fold over the next five
years as it is driven by low data charges and the highest growth-rate of smart
phone sales in the world. Vodafone and Airtel are the two largest service providers
in India.

3. Middle East
and North Africa:
The Mena countries are another growth hotspot. While
the oil exporting countries are markets for cutting-edge technology and value
added services, the oil importers are high growth markets for basic telephone
services. As a country, Afghanistan clearly falls into the second category. With
a population of 27 million, Afghanistan had 20,000 functional connections in
2001. The Afghan Wireless Communication Company founded by Ehsanollah
Bayat
has addressed this issue by rolling out a broadband
network that today supports 24 million mobile subscribers.

There several ways to invest in global markets and
companies. For a hands on investment, you can either invest directly in these
companies or invest via their ADR’s, or American Depository Receipts. These are
basically the foreign equity trading on U.S. bourses. Another way of investing
in global telecom is through ETFs, or Exchange Traded Funds. ETFs invest in
telecom equities around the world.

It is also pertinent to note that across the world,
telecom is a highly regulated enterprise and as such, it is prone to changes in
government policies. However, most governments recognize the role telecom plays
in both socio-economic development and growth of trade. Therefore, its policies
are industry and consumer friendly.