Merrill Lynch equity and quant strategists are underweighting the new communications services sector even though the firm’s fundamental strategists have positive outlooks on Facebook and Google, which constitute about 40% of the new sector’s weighting.
The strategists, led by Savita Subramanian, write in their latest outlook that the new communications sector could come under pressure from rising interest rates, which would “pressure high dividend yielders,” from regulatory concerns about privacy and from a “broadening of U.S. economic growth,” which could drive investors out of “crowded secular growth internet stocks into less crowded GDP-sensitive sectors.”
The strategists are also concerned about more aggressive capital expenditures by companies in the new sector. Big-spending, high-growth stocks tend to underperform, while the opposite tends to be true for industrials and select tech stocks that did not move to the new communications sector, according to the report.
On the flip side, the strategists note the strong balance sheets and advertising spending, cash return and disruptive strengths of Google and Facebook, the heaviest hitters in the new index. “An underweight view on Communication Services is not an easy call to make.”