First, it was Daily Mail and General Trust. Then, it was Yell Group. This week, ITV become the third stalwart of the media sector to be thrown out of the FTSE 100 in the space of less than a year.

The commercial broadcaster’s relegation from the ranks of Britain’s biggest companies is one of the more conspicuous signs of a relentless sell-off that has seen its peer group lose one third of its stock market value since May 2007.

Another sign is this week’s stalling of the bid battle for Informa. For the second time in two years, the publisher of Lloyd’s List is likely to be left on the shelf after failing to elicit an offer at a level its management is willing to accept.

However, could now be the time to turn positive on publishers, advertising agencies, television operators and their ilk? A glance at their profit forecasts would suggest not. The last time the UK endured a consumer-led recesssion – between 1990 and 1991 – the sector’s cumulative earnings fell 25 per cent. If the current economic downturn comes anywhere close to mimicking its predecessor, media stocks still look far too expensive.

Consensus profit forecasts for 2009 have already fallen by 20 per cent from their peak – or some 14 per cent in the year to date – but even so, they assume a decline of just 1 per cent next year, followed by growth of 9 per cent in 2010. That outlook appears overly optimistic. Royal Bank of Scotland suggests that 2009 estimates could still be up to 25 per cent too high – implying that the profit downgrades of the past year or so are only halfway complete.

So it might seem odd that RBS yesterday advised investors to start buying the sector – a move that was accompanied by solid share-price gains for Mecom, Pearson and Trinity Mirror.

The bank’s argument has four elements. First, in terms of both absolute and relative valuations, media stocks appear unusually cheap. The sector curently trades at 11 times historic earnings, a level that it has reached only once before in the past 25 years – in late 1990, from which it swiftly rallied 30 per cent.

Secondly, media is a patch of the stock market in which it pays to be premature – by the time there is clear evidence of economic recovery, it is already too late to buy. For example, if investors had waited until late 1991 to pile into media stocks – when GDP began ticking up – they would have missed out on that 30 per cent gain. Instead, the sector traded sideways for a further year, before heading sharply higher once again.

That episode prompts RBS to conclude that the media sector typically bounces nine months before GDP growth falls to its worst. On the bank’s view that the UK economy should start growing from the middle of next year, the current quarter should prove the trough.

Thirdly, media stocks have a time-honoured tendency to rally in the last three months of the year – perhaps for no other reason than that the managements of media companies have a habit of entering a new year with increased bullishness over the strength of their customers’ spending, only for that confidence to steadily evaporate in the ensuing months. RBS points out that, over the past decade, the sector has fallen on average 9 per cent in the first nine months of the year, only to rally 10 per cent in the fourth quarter. Further, the sector has risen without fail in the final quarter of every year in which it fell in the first three quarters.

Fourthly and finally, falling profit forecasts and rising share prices can coexist. RBS identifies four years since the early 1990s – 1995, 1996, 1998 and 2003 – when downgrades to earnings estimates proved no impediment to strong advances in stock market indices.

The overall lesson would appear to be clear. Rather than fretting about what appears on nearly every measure to be a grim outlook for 2009, investors should instead look towards recovery in 2010 – a year that, for media owners, has the added benefit of containing a clutch of quadrennial events that are customarily accompanied by a pickup in advertising: the Fifa World Cup in South Africa, the Asian Games in China and US mid-term elections.

However, to indiscriminately buy media stocks feels foolhardy in a sector in which a severe cyclical downturn has been matched by a structural shift in buying behaviour – both by consumers and advertisers.

For example, the trends that have so badly undermined free-to-air broadcasters, regional newspapers and telephone directory publishers – media fragmentation and the proliferation of online alternatives, to name but two – show no signs of easing. The media sector is also dotted with companies whose balance sheets look likely to require refinancing should trading conditions get markedly worse – Yell Group being a commonly cited candidate for some form of equity issue.

So where to turn? RBS believes that the sector’s more defensive stocks – such as Reed Elsevier, which has been able to lock in customers through multi-year deals – are worth sticking with. More adventurously, it recommends buying advertising agencies, which it regards as “structurally sound” but with the greatest leverage to recovery.

They are also geographically diverse, exposed to the growth of digital media, and enjoy a “trusted adviser” status with their clients. For the London market, that means WPP – which remains in pursuit of TNS – and Aegis Group, its smaller peer.

Explore Markets

• United States

• Europe

• Japan

• China

• Russia

• The Gulf

• India

• Africa

Times Recommends

• Gazprom brands Ukraine 'a barbarian' in gas row
• Services sector raises fears over UK jobless
• Retailers surge as profits survive sales plunge