With many investors and fund managers concerned the Australian equity market is approaching its peak, we believe some unloved sectors — retail, media and mining services, — continue to offer value for contrarian investors.


As the prevailing economic conditions have recently softened, retail has been among the market’s worst performing sectors in 2017. No category of discretionary spending has been immune as softer consumer confidence, stagnating house prices and growing household debt are felt.

These headwinds have contributed to high-profile collapses and widespread profit warnings, including by Myer and footwear retailer RCG Corporation. Retail share prices have plunged with some companies, such as Adairs and Oroton Group, posting falls of more than 50 per cent so far this calendar year.

The negative outlook for retail has been compounded by the impending arrival of Amazon in Australia. Investors are concerned the online shopping behemoth could have a significant and disruptive impact on local retailers through its innovative business model. While the risks posed by Amazon are tangible, we believe they have been overstated and this has generated considerable fear among investors.

Notwithstanding the resilience of some stocks, the retail sector overall is struggling and we predict conditions will remain challenging in the short term. However, if consumer sentiment picks up, the outlook for retailers could quickly turn around. After significant share price adjustments, many retailers are trading at historically low price-to-earnings (P/E) ratios. This presents investors with opportunities to buy companies trading well below their long-term average.


Media is another sector broadly shunned by investors. Free-to-air TV and publishing companies are particularly unpopular as their business models continue to be undermined by the disruptive effects of the internet, particularly streaming, which has eroded advertising revenues.

But imminent changes to the industry’s regulatory framework have the potential to improve the sector’s fortunes. The first is the abolition of broadcast licence and datacasting fees aimed at levelling the media playing field, which has been transformed by ubiquitous online platforms such as Facebook, Netflix and YouTube.

As announced in the federal budget, from July 1, 2017 free-to-air broadcasters will be charged a considerably lower “spectrum fee”, saving them about $90 million a year and significantly improving their profitability.

Further, a major media reform package announced by Communications Minister Mitch Fifield in early May and currently before parliament is set to provide a further boon for the media industry.

New laws would abolish the two-out-of-three rule that prevents media owners from having a TV station, a newspaper and a radio station in a single market. The reach rules that restrict a TV station broadcasting to greater than 75 per cent of Australia’s population would also be repealed.

Contingent on the support of the Senate cross-bench, the potential impacts of the proposed new media laws are significant and broad-reaching. ASX-listed media companies across the broadcast, publishing, radio and outdoor media segments will likely be affected, with the reforms inevitably leading to industry consolidation.

The associated mergers and acquisitions would provide investors with the opportunity to benefit from offers at a premium to the prevailing share price.

Due to the competitive challenges within the industry, valuations of many media companies have fallen sharply making them appear quite cheap in the current market. In our view, HT&E (formerly APN News & Media), Fairfax Media and Southern Cross Media are among the companies representing good value and are well-positioned to benefit from slated legislative and regulatory changes.

Mining services

Mining services is another sector offering investors opportunities in the current market.

With the resources sector bottoming out around 18 to 24 months ago, the most recent mining downturn was longer than average.

As a result, businesses with excessive debt could not withstand the prolonged poor business conditions and ultimately failed. By contrast, companies that could endure the extended downturn emerged resilient and in a stronger fiscal position.

With Chinese government stimulus preventing a hard landing for China’s economy, there is demand for Australia’s resources and we expect the sector will see continued earnings growth.

Numerous companies exposed to mining are set to benefit, such as mining technology company Imdex and resources sector power provider Pacific Energy. We believe these companies offer the opportunity for contrarian positions as institutional investors are generally under-represented on their registers.