Market Comment – From Telecoms to Communication Services. Sector changes underway

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The world of communications is changing, and now the index providers, MSCI and S&P, are catching up.

In response to the growth of new technologies and business models, the classification system used to pigeonhole companies is being revised. The result is that the sector identification for some companies in the Consumer Discretionary and Information Technology sectors will change. Some large and well-known companies are being added to the sector previously known as Telecommunications. Its new name is Communication Services.

The makeover for the Telecommunications sector will be implemented today by S&P and in November by MSCI, as part of its regular semi-annual review. Changes in ABN AMRO client portfolio classifications, where MSCI benchmarks are routinely used, have already been made.

Alphabet, Facebook and Disney join the new Communication Services sector The once almost-sleepy Telecoms sector is being enlivened with the addition of media & entertainment companies, which had previously been classified within the Consumer Discretionary sector and the Information Technology sector.

One of the biggest changes is that the new Communication Services sector boasts the addition of an Interactive Media & Services subgroup, consisting of “companies engaging in content and information creation or distribution through proprietary platforms, where revenues are derived primarily through pay-per-click advertisements.” This new subgroup includes search engines, social media and networking platforms. The other new subgroups within Communication Services are advertising, broadcasting, cable & satellite, publishing and movies & entertainment.

As a result of the reclassification, companies such as Facebook, Alphabet, Comcast, Netflix, Tencent and Disney are now considered Communication Services companies. Moreover, Ebay and Alibaba will join Amazon in the Consumer Discretionary sector.

In announcing the change, MSCI noted that the revisions were driven by the rapid evolution in how people communicate and access entertainment and other content. Company consolidations and mergers had also led many companies to bundle cable, internet and telephone services, while also beginning to create their own interactive content that could be accessed through multiple platforms, including smartphones. As a result, neither the old Consumer Discretionary sector nor the IT sector -- as defined -- were still a good fit for companies with these expanding business models.

What it means for investors

Given the introduction of some IT giants to the Communication Services sector, the new sector differs from the ‘old’ Telecoms sector in a number of ways:

Larger market capitalisation, comprising almost 8% of the MSCI World Index, while the Telecoms sector was less than 3%. More diversified. More exposed to growth, i.e. more cyclical in character. These effects are more pronounced in the US than Europe. For example, in Europe, the new sector is still comprised mostly (62%) of telecoms companies, while in the US, Interactive Media & Services companies (46%) dominate.

No changes in sector preferences

ABN AMRO’s equity experts have made no change to their sector view in response to the changes in sector classifications. As some parts of the neutral-weighted Consumer Discretionary and IT sectors are joining the less favourably viewed (underweighted) Telecoms sector, the new Communication Services sector has, on balance, a slightly underweight allocation. Within the new Communication Services sector, however, online platforms and game developers are favoured. See below for ABN AMRO’s sector view.

ABN AMRO sector view


  • Energy
  • Industrials


  • Materials¬†
  • Consumer discretionary
  • Consumer staples
  • Health care
  • Information Technology


  • Financials
  • Communication Services
  • Utilities

Source: ABN AMRO Private Banking

What we expect

As investors rebalance sector positions, trading volume has increased ahead of the implementation dates of the sector classification changes. The reclassification, however, has been well signalled. It is therefore no surprise to markets and no disruption is expected.

We continue to advise taking a well-diversified approach to stock investing, across sectors and regions. In addition to favouring the Energy and Industrials sectors, we also prefer the stocks of the US over Europe.

Olivier Rangeard, Global Head Equities
Piet Schimmel, Senior Equity Thematic Expert