The scandal over the use of data by social media giant Facebook has wiped tens of billions off the company’s market valuation and has significant implications for several areas of the market including some UK-listed stocks.

The event is also important to many UK investors as Facebook is a popular constituent of numerous funds and investment trusts, as well as being tracked as part of broader indices by many exchange-traded funds (ETFs).

WHAT HAPPENED?

Shares in Facebook have been under pressure as lawmakers on both sides of the Atlantic have stepped up their scrutiny of a recently publicised data breach of more than 50m user accounts.

It emerged this data, initially harvested by academic Aleksandr Kogan, had been used by Cambridge Analytica in its political campaigning work, including on the US presidential election in 2016.

There are reports US consumer body, the Federal Trade Commission, has opened an investigation into whether Facebook has violated privacy agreements. Since the news broke on 17 March, Facebook’s stock has fallen by 13.5% in value.

WHAT HAS BEEN FACEBOOK'S RESPONSE?

After days of silence chief executive Mark Zuckerberg eventually apologised for the ‘breach of trust’ and the company has said it will change the way it shares data with third parties.

WHAT ARE THE IMPLICATIONS?

The fear stalking the likes of Facebook and Twitter, which has seen its own share price fall more than 10%, is that the scandal will lead to greater regulation of the way these companies use data. This could severely damage their business models.

Both companies make money by employing data to help advertisers direct their messaging in a targeted way to encourage consumers to buy their products and services.

What’s now apparent is that Facebook has been extending this model into the political sphere, where campaigners also want to influence users’ behaviour.

The other risk is that people take matters into their own hands by deleting their social media accounts – though the fact a campaign to this end is namechecked #DeleteFacebook shows how entrenched social media now is in everyday life.

WHY DOES IT MATTER TO UK INVESTORS?

The woes at Facebook have prompted a wider sell-off in the technology sector. The big US tech firms, Facebook, Amazon, Google-parent Alphabet, Apple and Microsoft are the five largest companies in the world and represent more than 10% of the S&P 500 index.

They therefore have a big influence on how US stocks perform which in turn tends to have a knock-on effect on other global markets. An exceptionally strong run for shares in these businesses has been a big factor behind the recent record highs posted by equities.

Investors in passive products such as exchange-traded funds which track US shares may have material exposure to Facebook – ETF providers like Vanguard and BlackRock are big shareholders.

Several actively-managed UK funds and investment trusts also have material holdings in the business. Specific products which include Facebook in  their top 10 holdings include Neptune Global Technology Fund (GB00BYXZ5N79), Baillie Gifford American Fund (GB0006061963) and Polar Capital Technology Trust (PCT).

The damage wrought by Facebook’s share price decline on these funds should be kept in perspective, even if a wider tech sell-off could act as a more significant drag on performance.

Polar Capital Technology Trust, for example, has 5.2% of its fund in Facebook. An 11% fall in the shares amounts to a 0.6% negative impact on the portfolio as a whole.

WHAT OTHER INDUSTRIES MIGHT BE AFFECTED?

Facebook has been a significant disruptive force in the advertising sector. In little over a year, shares in global advertising agency WPP (WPP) have fallen 40% to £10.88 principally for two reasons.

First, they’ve been hit by a series of earnings downgrades. Secondly, they’ve suffered amid fears that advertisers will dispense with WPP’s services and deal with the likes of Facebook, Twitter and Google (which alongside its all-encompassing search engine also owns YouTube) directly.

Liberum analyst Ian Whittaker comments: ‘For the agencies, the news flow should be seen as a positive as the concerns over the online players such as Facebook and Google around viewability, brand safety, use of data, etc., weakens dramatically the argument that clients should disintermediate the agencies and go directly to the big online platforms.’

Whittaker reckons a big winner could be free-to-air broadcaster ITV (ITV) as the news could stop some of the flow of advertising cash from TV to online. In his view it also represents an opportunity for the company’s video-on-demand service ITV Player to secure greater advertising spend.

In May 2017 some big names pulled ads from YouTube after their brands were displayed alongside extremist content. There is a far less significant risk when advertising against the curated content available on ITV Player.

Whittaker estimates that if ITV captured 10% of the online display advertising market by 2020 against his current forecast of 6.5% it could boost earnings by as much as 7%. (TS)

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