The decade long post-international financial crisis has been led by tech stocks and particularly their U.S.-based FAANG monarchy of Facebook, Amazon, Apple, Netflix and Google (Alphabet). However, they finally appear to have come a cropper. The first four have shed over 23% since their 2018 highs, much of it over the past few weeks. Alphabet has fared slightly, but only slightly, better and is down some 18%. But why are they now plunging?
Over aggressive valuation multiples based on optimism for future revenue growth that may possibly never happen? It’s not as though investors haven’t been perfectly aware of that and ready to take a calculated risk on it for a long time now. So something else must have changed. Perhaps the conditions and mentality that supported the willingness of those investing online in their stocks to take that calculated risk?
Tech stocks have undoubtedly benefited from an environment of quantitative easing and low interest rates. Labour costs, whether those associated to the cost of manufacturing in China or other parts of Asia, or those for highly skilled technology experts at home, are rising. In the case of the former as the economies and politics of Emerging Markets countries evolve. In the case of the latter as competition for their services gets ever fiercer.
Tech companies such as the FAANGs also thrived in an international regulatory environment that wasn’t built for the new reality they represented and so afforded them almost unhindered growth. A globalised world criss-crossed by free trade and low tax agreements was another huge boost. Regulation and globalisation are now both changing in a way that isn’t good for big tech.
New regulation tightening control on the data gathering practises is coming into play and will vary across geographies, forcing technology companies in more varied, expensive and modified models. Trade protectionism is also making a comeback, particularly with regards the relationship between the USA and China.
Money is also more expensive now as interest rates gradually rise. This appears to be leading to investors demanding greater certainty and obvious value in stocks they hold or are considering buying. The appetite for risk on a shimmering future promise has lessened. Fundamentals are more important again. That can also be seen in the struggles of Emerging Markets as well as the crash of cryptocurrencies, most of which have now lost 90% or more since the beginning of 2018. We’ve entered a new stage of the market. That doesn’t necessarily mean a major crash or global recession is inevitable. But it does look like investors now accept neither are not a reasonable risk and are now pricing that into markets. That could even mean both are avoided and a healthy re-pricing of markets and risk more generally stabilises global growth.