Markets are fretting about the fate of the FAANG stocks (or FAAMG, if you prefer to substitute Microsoft for Netflix, which makes as much sense as anything else).
The tech giants – Facebook, Amazon, Apple, Netflix and Google (now called Alphabet) – have been the main drivers of the market for a while now. If they fall over, the fear is that everything else will too.
Active managers are also particularly worried – which is one reason you’re hearing so much about it – as “overweighting” the tech stocks has been one of the few relatively safe ways to beat the average passive fund in recent months.
Higher interest rates are a threat. And so is the fact that these stocks are really, really expensive by most measures.
Those are valid reasons to worry. But the truth is that there’s a far bigger threat to tech stocks – politics…
Silicon Valley: money, influence, and rampant hubris
As my colleague Merryn Somerset Webb has said on numerous occasions over the past few years, “the real threat to Big Tech is Big Government.”
This is starting to become very clear to anyone reading the news. Google has just been fined a whopping €2.4bn by the European Union (EU). The EU argues that Google manipulated its search engine results to promote its own price comparison service.
Google is going to fight the fine, and there are plenty of arguments on both sides as to whether there’s a hidden agenda, whether it’s unreasonable or not, and all the rest of it. But those are beside the point.
Whatever you think the root cause behind the recent upsurge in political discontent is about (I’m still going with the theory that it’s mainly fallout from 2008, but I’m open to other views), the overall outcome is that the populous feels insecure.
That insecurity breeds a dislike of many things, rapid change being one. Alongside globalisation, few things have driven more rapid change than Silicon Valley over the last couple of decades.
People have welcomed the tech revolution. Consumers have lapped up smartphones, online shopping, and Elon Musk’s just-on-the-right-side-of-bonkers sci-fi visionary schtick.
But they’ve also been deeply unsettled by changes to conventional ideas about privacy (you shouldn’t have any and you shouldn’t need any, seems to be the message from the tech titans); job security (same again – we’re all micro-entrepreneurs now, apparently); and even money (digital is highly convenient, but this further abstraction also makes it even harder to wrap your head around what money actually is).
The danger is that this makes Silicon Valley a convenient, and sometimes deserving target of government opprobrium. As Rana Foroohar points out in the FT (it’s worth reading her piece if you can), Silicon Valley has become the new Wall Street in terms of influence, money, power – and self-regarding hubris. “Silicon Valley remains in a cognitive bubble, reluctant to engage with legitimate public worries over monopoly, privacy and tech-related job disruption, not to mention its own culture.”
That won’t last. Because regardless of how impervious these guys feel, if Big Tech ends up in a confrontation with Big Government, Big Government will win.
The disruptors would be easy to disrupt
It’s easy to sneer that politicians don’t understand what they’re talking about. Most of the time, they don’t (cryptography is the classic one). But they make the rules. So if your idealistic vision of society, based on the ideas of a bunch of unworldly, arrogant 20-somethings, conflicts with the view of the people who actually run things, then you’re going to lose.
These companies look unassailable. But it really wouldn’t take a lot to disrupt the disruptors. Many of the business models are based on regulatory arbitrage – on using technology to bypass existing rules in some way.
For example, all of the “gig” economy and most of the “sharing” economy companies are built on ignoring employment law, or on dodging regulations designed to protect consumers from low quality or dangerous service providers.
Meanwhile, Google and Facebook make most of their money by trying to get to know you better than you know yourself, and then selling you to advertisers. They provide plenty of benefits in return (well Google does – I don’t use Facebook much so I can’t really comment), but that’s the trade – your data in exchange for communication services.
Just to be clear – I’m not saying that these companies are right or wrong. All advancing technologies run ahead of the laws that end up governing them. You can’t have a highway code without inventing cars and building roads to run them on first.
And in many cases, advancing technology does reveal that old regulatory regimes are outdated, or boil down to pure and simple protectionism, apparently designed to protect consumers but in fact constructed as a moat around existing companies by powerful lobbyists (check out the battle to regulate e-cigarettes, for example). Uber might be run by a bunch of twits, but equally, there’s no need for the taxi monopolies of global cities to be quite so tightly enforced.
But my point is that governments can make life harder for these companies with very little effort. Maybe you start to argue that it’s unfair that these companies are making money out of people’s personal data without the individual getting a cut. Maybe you tighten up data protection laws to the point where it becomes impossible to store information on any individual who hasn’t signed off in triplicate – with exemptions, of course, for all government departments. That’s all extreme – but you get the point.
Expensive, an easy target for governments, and set to struggle if interest rates rise and funding is no longer virtually free – those all seem pretty good reasons to think twice before sticking more big tech stocks in your portfolio.