Expectations of accelerated interest rate rises sent equity markets into a tailspin in February, impacting the first quarter and setting the tone for the calendar year. The good news is that it’s not all doom and gloom and investors can look to the media and retail sectors for opportunities over the medium term.
Digital darlings lose their appeal
One theme discovered during the recent reporting season is the trend away digital advertising spend back towards traditional advertising on TV and radio. The digital media market is maturing after many years of double-digit growth while many advertising agencies are finding it hard to accurately measure return on investment. As a result, advertisers are beginning to move from the likes of Facebook and YouTube back towards free-to-air television and radio advertising.
In the US, consumer goods company Procter & Gamble, the world’s largest advertiser, was among several companies to boycot YouTube when it discovered video ads were running before extremist and racist videos. Procter & Gamble cut more than US $200 million in digital ad spend in 2017 including cuts of 20% to 50% at ‘several big digital players’ and is set to return to YouTube on stricter terms.
Following the Cambridge Analytics scandal, Tesla CEO Elon Musk deleted the company’s pages and Subway, Sonos and Hewlett Packard also suspended their spend on Facebook advertising. The latest data from US research firm eMarketer showed that Google and Facebook’s combined US digital ad market share will drop for the first time this year.
In contrast, traditional media is easy to control and measure. In our opinion, Australian media company Nine Entertainment (ASX: NEC) delivered one of the best results during the recent reporting season. The company are well positioned to take advantage of this trend in the coming years with their market leading position.
"The latest data from US research firm eMarketer showed that Google and Facebook’s combined US digital ad market share will drop for the first time this year."
Slow and steady growth in retail spend
The long suffering retail sector has been particularly out of favour since the announcement that Amazon would launch in Australia. Amazon has yet to make an impact since arriving in December 2017 and the retail sector is the cheapest it has been for long time. The macro economic environment continues to improve in Australia – consumer confidence is slowly returning and unemployment is stable, making a compelling case for retail going forward over the next few years. Companies with strong management are well placed to benefit from sector’s tailwinds, including Noni B (ASX: NBL).
Causes for concern
Valuations are high and the greatest risk to global equity markets is a contraction in price-to-earnings multiples due to faster than expected increases in interest rates resulting from stronger global macroeconomic conditions. In the short term, we are cautious about the effects of another inflation scare most likely triggered by the US Federal Reserve raising rates at a faster pace than expected.
After the Whitehouse decided to impose tariffs on China in March, heightening concerns about a global trade war, companies dependent on exports will demand close observation. The broader effect on the Australian equity market is yet to be fully understood as the geopolitical space is highly dynamic. Good news from the US may come in the form of detail on President Trump’s infrastructure spending package.
Listed investment companies managed by Wilson Asset Management invest in NEC, NBL and ASL.
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Chris is the Chief Investment Officer of Wilson Asset Management, having joined the company in 2006. He is also the Portfolio Manager responsible for WAM Capital (ASX:WAM), WAM Research (ASX:WAX), WAM Active (ASX:WAA) and WAM MicroCap (ASX:WMI).