Moscow, June 17 — “Conduct. Economy” the government will be Able to establish control over the market of high technologies or not? That’s what investors want to know before continuing to buy Nasdaq shares and FAANG, which came a significant part of market growth over the past 10 years.
Not to say that regulatory issues faced by technology stocks, was something new. Back in April 2018 Bank of America outlined “10 reasons why global investors have cut investments in the technology market in 2018”. It was noted that this is the most poorly regulated sector. It operates a total of 27 thousand laws and regulations (chart 7), while in the sphere of production ─ 215 thousand in the financial sector ─ 128 thousand
[PICTURE] [/PICTURE] However, despite the escalating war of words between trump and the richest man in the world, Amazon CEO Jeff Bezosa, despite the death threats that come from the Congress to the companies from Apple to Facebook and Google, equity investors remain optimistic regarding the development of regulatory standards in the market of technology stocks.
Perhaps this is the answer to investors ‘ optimism about the market, which is trading just 2% below its historical high, despite a lot of potential macrosolve: even if the presidents trump and XI are planning to meet at the G-20 summit, after lagging the S & P 500 index by 700 b.p. in may, a basket of U.S. stocks with high sales in China overtook 360 b.p. in June. Investors also expect support from the fed and shrink at the July FOMC meeting.
And, despite the fact that the General optimism is understandable, it is not entirely justified. As well as the fact that the shares of semiconductor companies reached a record level of just over a month ago, and after the collapse of Huawei came the bear market.
Meanwhile, on the high-tech sector are gathering storm clouds. As chief Goldman strategist David Kostin, “policy strengthened attention to antitrust issues. The justice Department is launching the investigation, the Judicial Committee of the house of representatives has launched an antitrust investigation against technology giants, a number of presidential candidates have introduced a proposal to regulate large corporations.”
In these circumstances, the markets are showing some concern. Action Info Tech and Comm Services fell by 2% and 3% on Monday, 3 June. It happened after the weekend in the media appeared reports that the U.S. Department of justice begins an antitrust investigation against Google. Since then, both sectors rebounded (+9% and +5% respectively, compared with +5% for the S & P 500).
But if investors can remain complacent in the background of the turbulent political landscape and concentrated on the U.S. stock market, regulation may carry a risk.
As Goldman notes, the number of registered U.S. companies declined from 8 million in 1996 to 4 thousand now. Focus on the stock market exceeded the long-term average, when the largest companies accounted for a significant share of the sales when they have received high market power over consumers and workers, increased the rate of profit.
The uncertainty around potential litigation are high, at the same time, investors are in a constant state of euphoria. So the Kostin warns that investors should reduce risks at the target companies in the case of the antitrust claims. The impact of regulations on stocks will depend on the specific case. However, it is necessary to highlight three fundamental features:
1. Stock prices fall between filing a claim and final decision
2. Lawsuits can take years
3. Sales growth slowed after the decision
[PICTURE] [/PICTURE] But wait, there’s more! Not counting the potential for government intervention, destructive and unpredictable, all investors are ignoring the greater risk. Higher rates may carry a risk for technology stocks in General, and the companies-software developers in particular.
As Goldman warns, the information technology sector S & P 500 “value premium on two times the standard deviation above 10-year average on a number of indicators”.
[PICTURE] [/PICTURE] meanwhile, the shares of companies that supply software that is sold with a particularly high valuation premium. Such estimates of stock price Goldman reflect what Kostin calls “the greed of investors for a stock with strong growth prospects. In 2019, growth stocks significantly outperformed performance: long/short growth factor increased by 7% YTD and 22% from the beginning of 2017”. [PICTURE] [/PICTURE] Such dynamics is not surprising at the end of the economic cycle, when investors are willing to pay a premium for growth with the slowdown in economic activity.
However, most investors may not know that the global technology sector, a huge margin and everything else is already experiencing a decline in revenues, as can be seen in the following graph BofA.
In the end, it all comes to an end. Only need flash, which will happen when the Ministry of justice announced the antitrust lawsuit, or other effect on stocks, the cost of which remained high for most part of the last decade. First, the government broke the bubble in the market of the tobacco companies, then the bubble on the market of biotech companies. Now came the turn of technology companies.
The world is becoming more populist, so the public anger will fall on the sector that showed the best results after the last recession. And this is the technology sector.
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