SPDR Strategy Espresso : Happy Birthday US Communication Services

SPDR : Large-scale reclassification within three GICS sectors in September 2018 resulted in significant index rebalancing, the launching of new funds and increased investor activity....

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By SPDR EMEA ETF Strategy Team

S&P index changes took place on 24 September 2018, the most important of which was to the renamed Communication Services sector (previously known as Telecommunications Services).

The new sector held a grouping of dominant interactive media stocks, wellknown media and entertainment providers, and large telecom firms.

What a Year it has Been

The early days weren’t easy. The new grouping fell faster than the market average during the market correction of Q4 2018 as investors fled tech-inspired names and sought relative safety in more defensive equities or bonds and cash. However, from the start of 2019 through to the end of April, the sector rallied on expectations of attractive earnings growth.

Fears of political interference in the largest names subsequently held the sector back somewhat, but it is now showing renewed momentum and has gained 24.4% since the start of the year (against the market’s 20.9% rise).*

The best performer this first year has been Twitter, with total returns of over 50% on rising user numbers.

Whilst all investor eyes have been on large, high profile stocks such as Facebook and Alphabet, there have been significant contributions to sector performance from AT&T, whose share price has been boosted by interest from an activist investor, and Walt Disney, which excited investors by announcing a new video streaming service; both stocks have contributed approximately 25% of the sector’s total index move.

At launch there were questions about how this mix of businesses would sit together; we argued that the basket was attractive and the results are supportive.

There may be Bumps…and then Cake

Alphabet is facing anti-trust investigations in the United States, based on concerns around whether Google is engaged in monopolistic behaviour in its advertising business.

The zeal of politicians and regulators could spill over onto Facebook, which has its own battles regarding privacy lawsuits.

One result of this politically inspired activity could be a break-up of the businesses. Yet those moves could take years and face lengthy court challenges; moreover, a break-up is not necessarily harmful to the shareholder.

Communication Services will likely never be dull.

The sector falls at the intersection of media communication and content, spanning social media, entertainment and video games. This positioning means there will almost always be companies offering rapid sales growth, significant newsflow, and FAANG focus.

The rise of digital advertising may also be a driver for the sector, as the large social media players provide the platforms to reach huge audiences globally .

Buying the sector as a basket gives access to all these themes without having to pick the ultimate winner or be heavily exposed to idiosyncratic stock risk.

*Index figures for S&P Communication Services Select Sector Daily Capped 25/20 Index NTR and S&P 500 net total return index.


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