European telecoms stocks are at fresh record lows relative to the market after years of investor neglect in markets dominated by megacaps that offer fatter returns.

Since early 2000, Europe's telecoms have seen their market cap collapse six-fold to $270 billion.

"We strongly believe that M&A can draw attention to a completely forgotten equity sector," said Fabio Caldato, portfolio manager at investment company AcomeA SGR.

"We're building the position. There may be cross-border M&A that finally reduces competition and raises margins for telecom operators," he added.

Vodafone this week announced exclusive talks to sell its Italian arm to Swisscom for 8 billion euros ($8.7 billion), adding to other potential transactions in the making.

Mediobanca Securities analyst Fabio Pavan said the deal "was a step in the right direction" as it would create a group with a more than 30% share in both fixed and mobile markets in Italy, home to the European Union's third largest population.

"The telecom sector continues to show a strong need for remedies; M&A is the only effective one, opening a virtuous cycle of price-ups," Pavan also said.

The sector has been plagued by many players fighting for market share, while facing costly network upgrades to meet growing demand for data. Analysts say industry consolidation could end price wars, allow companies to cut admin costs, and get synergies by sharing technology and infrastructure.

Telecom Italia is selling its fixed-line network to private equity investor KKR for up to 22 billion euros in "game-changing" deal BofA analysts believe will help the Italian group "remove the shackles of debt".

Orange and MasMovil got Brussels' conditional clearance in February for their 18.6 billion euro tie-up in Spain, while unlisted telecoms group Iliad took a $1.3-billion stake in Sweden's Tele2, as its top investor, French billionaire Xavier Niel, seeks to push consolidation.

Caldato said the French, Spanish, Italian and British telecoms markets could offer opportunities, especially where companies have done most of the capex to upgrade their networks.

A European Commission document suggested regulators may loosen merger rules, although antitrust chief Margrethe Vestager in Brussels said last week such a move was not under consideration.

Investors are still chronically underweight European telecoms, but data from Morgan Stanley on funds with a combined $1.2 trillion in assets has shown positioning is on the rise. The percentage of global funds overweight telecoms has reached 31%, the highest level since at least December 2013.

In the past year, European telecoms have lost 8%, logging a 17 percentage-point underperformance relative to the region-wide STOXX 600 index. On a forward PE basis, they trade at a 7% discount to the market, according to LSEG data.

($1 = 0.9237 euros)

(Editing by Amanda Cooper and Jan Harvey)

By Danilo Masoni