The dominance of tech giants in US markets should be analysed in the context of shifting populist politics in the US and increased regulation in Europe, as well as the potential investment risks to the sector, Pendal Group senior investment analyst Paul Gyenge said.
Political and regulatory issues are beginning to bite FAANGs – a nickname for the tech sector’s five best-performing stocks: Facebook, Apple, Amazon, Netflix and Alphabet’s Google.
“At Pendal, we think it’s an increasing risk that the market is just coming to terms with and doesn’t really understand properly,” Gyenge told delegates at the Investment Magazine Equities Summit in Melbourne earlier this month. “Given that valuations are also incredibly elevated, it also has the potential to have a significant impact on the market going forward.”
FAANG stocks have increased their weighting in market valuations. Gyenge noted that over the “last couple of years”, FAANGs have gone from 10 per cent of the market to 15 per cent, while accounting for 20-30 per cent “of the increase in the market’s valuation” and peaking in June at nearly 40 per cent.
This becomes a self-reinforcing cycle driven by passive investing and the rise of exchange-traded funds; the weights of stocks in passive vehicles go up when prices increases, leading managers to increase weightings in their vehicles, which leads to more price increases in stocks.
“The issue here is that without a rational investor to understand and assess the fundamental risks and rewards of these companies, the market is slowly but surely getting away from fundamental value,” Gyenge said. “We’re starting to see that over the last couple of months.”
Political changes
In terms of political risks, until recently, the FAANGs had a reputation for being “the good guys”. That attitude peaked during former US president Barack Obama’s tenure bit it has changed dramatically, Gyenge said.
“Fast-forward now to [US President Donald] Trump who actively tweets against Amazon on postal prices, taxes and [the Amazon-owned Washington Post newspaper] and the media and content issue,” he said. “For Trump, this makes complete political sense. His core base over the last few years has seen the full force of the impact of having to take Amazon warehouse jobs at minimum wage, or close to it, versus the high-paying tech jobs going to blue states. Now we’ve gotten to a point where the dynamic has reached a tipping point.”
Regulatory pitfalls
On the regulatory side, the European Union has stepped in with investigations leading to heavy fines for Google, Gyenge said.
“In July, the EU fined Google $4.3 billion euros ($7 billion) for abusing the Android monopoly to push apps on its own platform. That is, Google forced phone makers to install the Chrome browser as part of the requirement of having the Android software on their platform. The repercussions of the case are that Google very much has to open up and give the manufacturers opportunities to have other browsers installed on their platforms.”
Gyenge also noted that the impact of the EU’s General Data Protection Regulation (GDPR) legislation – designed to give individuals control over their personal data, amongst other initiatives – has not yet been felt by companies such as Facebook. But regulation, and the threat of more regulation, increases risks to companies in the event of a “slip up”.
