Bryan Taylor, Chief Economist, Global Financial Data
S&P Global and MSCI are making some major changes in the GICS sectors which will be enacted at the end of September. Under the old GICS, Telecommunications was one of the 11 GICS sectors which included primarily telephone companies. S&P Global and MSCI are changing the Telecommunications Sector to the Communications sector which includes not only Telecommunication Services, but Media and Entertainment stocks, which includes Advertising, Broadcasting, Cable & Satellite, Publishing, Movies and Entertainment, Interactive Home Entertainment and Interactive Media Services.
The most significant impact of these changes is that two companies that formerly were part of the Information Technology sector, Alphabet and Facebook, will be moved over to the Communications sector while Amazon has become part of the Consumer Discretionary sector since it is classified in the Internet & Direct Marketing Retail sub-industry. Although this leaves Apple and Microsoft in the Information Technology sector, this change has dramatically reduced the size of the Information Technology sector in the GICS. At the end of August 2018, the Information Technology sector represented 26% of the market cap of the S&P 500 while Telecommunications represented only 2%. These changes have turned the conservative, high-yielding Telecommunications sector into the high growth, low-yielding Communications sector. This reorganization of the GICS sector will balance out the two sectors by market cap more evenly.
This raises the questions, however, as to how the Media & Entertainment market cap of the new Communications sector has grown over time. Global Financial Data has data on the American stock market going back to 1791 and has classified all of the stocks traded on American exchanges over the past 225 years by GICS and sector. We have been able to calculate how the Media & Entertainment stocks have grown within the Communications sector over the past 150 years. The graph below illustrates these changes.
As the chart shows, up until around 1960, telecommunications represented around 80-90% of the total communications sector. Not surprisingly, the period when the communication stocks represented the largest portion of total market cap was in the 1920s when the bull market drove up the valuation of entertainment stocks, only to see their values collapse after the 1929 crash when the bull market came to an end.
The growth of the Media & Entertainment sector has been steady since 1965, increasing from 10% of the Communications sector in 1965 to 80% in 2018. One would think that the explosion of the internet in the 1990s would have created a break in this series, but this isn’t the case. The growth in Media & Entertainment has been steady over the past 50 years. You can see how the breakup of AT&T in 1983 and the telecommunications revolution that followed favored the Telecommunications industry for a few years, but this only delayed the inevitable growth in Media & Entertainment.
The basic criticism of creating the Communications sector out of the Telecommunications and Media & Entertainment is that combining these two industries into the Communications sector is like mixing apples and oranges. The Telecommunications sector is more like the Utilities sector, including high-yielding stocks with limited growth potential while the Communications sector includes two of the fastest growing companies on the planet, Alphabet and Facebook, as well as the potential for further growth from other sectors within the Media & Entertainment industry. The growth of Media & Entertainment has been a continuous process over the past 50 years. It is not a recent phenomenon.
On the other hand, if you compare the market cap of the Utilities and Telecommunications sector there has been an amazing long-term stability between the two as is illustrated below. Telecommunications has represented 40% to 50% of the Utilities and Telecommunications in most of the years since 1880. There were exceptions, such as the 1920s when Utilities were the fastest growing sector in the economy and the 1990s when the Telecommunications Revolution exploded, but the 40-50% range has dominated the relationship between the two sectors for the past 125 years. Contrast this with the growth in the Media & Communications relative to Telecommunication Services that has occurred during the past 50 years. Combining Utilities and Telecommunications into a single sector and allowing Communications to be a sector unto itself appears to be the logical conclusion of analyzing the long-term trends of these sectors.
To us, the logical rearrangement would have been to create the Communications sector as a new sector, and add the Telecommunications sector into the Utilities to create a Utilities & Telecommunications sector. There are four sectors in the S&P 500 that represented less than 3% of the total market cap in August 2018, Materials (2.49%), Real Estate (2.70%), Telecommunication Services (2.00%) and Utilities (2.88%). GFD’s Transportation sector represents 2.23% of the S&P 500 market cap. By combining the Utilities and Telecommunications sectors into a single entity, it would now represent 4.88% of the S&P 500 market cap the reduced Communications sector would represent about 10%. This would resolve the inherent conflict between a rapidly growing Media & Entertainment division within Communications and the low-growth Telecommunications sector.
For this reason, Global Financial Data is making this change in its sectors. Communications is a sector unto itself that excludes Telecommunication Services and the Telecommunication Services is now part of the Utilities & Telecommunications Sector.
We invite your comments on these changes.
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