Expectations of accelerated interest rate rises sent equity markets into a tailspin in February, affecting 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, retail and mining services sectors for opportunities over the medium term.
One theme discovered during the recent reporting season is the trend away from 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 boycott YouTube when it discovered video ads were running before extremist and racist videos. Procter & Gamble cut more than $US200 million in digital ad spend in 2017 – including cuts of 20-50 per cent at “several big digital players” – and is set to return to YouTube on stricter terms.
By 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. As a market leader, the company is well positioned to take advantage of this trend in the coming years.
Consumer confidence slowly returning
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 over the next few years. Companies with strong management are well placed to benefit from the sector’s tailwinds, including Noni B (ASX: NBL).
We are seeing strong evidence the mining cycle has turned.
Commodity prices are increasing and mining services companies are continuing to benefit from continued, albeit slow, growth in the Chinese economy.
While we do not expect the next mining boom to resemble the strength of the last, we are confident many mining services companies stand to benefit. We recently completed a tour of Western Australia and management teams are feeling confident. We believe companies that have undertaken strong cost reduction programs during the downturn are well positioned, such Ausdrill (ASX: ASL).
Caution on inflation scare
After the White House 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 Donald Trump’s infrastructure spending package.
Australian investors would also be wise to watch the evolution of the domestic dividend imputation argument. Adverse changes to the current policy would likely see a dent in retirees’ disposable income and cause capital to flow from equities into other asset classes.