Will Telstra and REA star again in 2022?

2021 was a strong year for the Australian sharemarket. The benchmark S&P/ASX 200 index rose from 6587.1 to close the year at 7444.6, a gain of 13.0%. When dividends are included, the return topped 17.2%.

One of the smaller industry sectors, Communication Services, was the best performing. Weighing in at only 4.5% of the total market, the sector recorded a gain of 32.6% for the year.

Communication Services is dominated by Telstra, which makes up 52% by market weight. In 2021, Telstra rose from $2.98 to $4.18 for a gain of 40.2%. Eleven other companies make up the balance, led by Seek and REA. The latter also recorded impressive gains, with Seek up by 16.4% and REA by 13.6%.

The biggest sector by market capitalization, Financials, which makes up 29.2% of the entire market, was the second-best performing sector overall with a return of 25.2%.

Following a loss of 5.3% in December and 6.1% for the December quarter, the Information Technology sector produced the worst return for the year of -2.2%. It was the only sector to finish in the red, with the disappointing energy sector climbing back into the black following a boost in oil prices in December.

Performance of ASX Sectors in 2021

Source: Switzer

For Communication Services to perform strongly again in 2022, it will need the sector majors (Telstra, REA and Seek) to continue firing. History stands against this because the best performing sector from one year is rarely the best performing sector the following year. This is no doubt a function of two factors – firstly, that macro trends aren’t tied to calendar years but can be multi-year or for just part of a year, and secondly, mean reversion, which is the tendency for prices and returns to revert to the long-run average level of the entire dataset.

The broker analysts are moderately bullish on each of the three leading stocks in the sector. According to FNArena, they have a target price of $4.41 for Telstra, implying upside of 5.3% from the last ASX price of $4.19, and target prices of $35.05 and $171.31 for Seek and REA. This implies potential upside of 12.7% and 7.0% respectively.

Telstra appears to be doing the right things as it goes about its business without much fanfare. Growing earnings (its first earnings growth in almost a decade), winning market share (particularly with its leadership in 5G) and reducing costs. It is no doubt being helped by the poor performance of its competitors, and the easing of competitive pricing pressures following the Vodafone/TPG merger.

I would describe Telstra as a fairly “boring” but “low risk” stock. Annuity style earnings, low risk profile, low volatility, low growth and annuity style dividends. But it is this “boringness” that means that its stock price does not go down much and remains solidly bid.

Seek and REA are of higher risk being subject to economic conditions and other factors they can’t readily influence. I am less keen on REA because if interest rates head up, this should impact turnover in real estate and exert downward pressure on new home listings. Seek has a dependency on hiring and recruitment intentions.

Bottom line is that while it is unlikely that the Communication Services sector will star again in 2022, Telstra’s dependable outlook should mean that the sector is a solid performer. And if interest rates stay low and employment conditions remain strong, REA and Seek will lend support.

Paul Rickard is the cofounder of the Switzer Report. All prices and analysis at 13 January 2022. This information was produced by Switzer Financial Group Pty Ltd (ABN 24 112 294 649), which is an Australian Financial Services Licensee (Licence No. 286 531This material is intended to provide general advice only. It has been prepared without having regard to or taking into account any particular investor’s objectives, financial situation and/or needs. All investors should therefore consider the appropriateness of the advice, in light of their own objectives, financial situation and/or needs, before acting on the advice. This article does not reflect the views of WealthHub Securities Limited.