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New and old business models compete for market favour

Governments are trying to find effective ways to tax Big Tech more and limit their growth. This would be a bad negative for the markets as a whole.

Governments are trying to find effective ways to tax Big Tech more and limit their growth. This would be a bad negative for the markets as a whole.

John Redwood

in Features


Equity and bond markets are rising together in continued anticipation of stimulus to come. Meanwhile second-quarter earnings reports show pronounced weakness around the world in manufacturing, and a general slowdown as a result. The car industry stays at the centre of the storm, with continued poor sales. The output has been hit by higher car taxes, by uncertainty about future regulations on diesel and petrol vehicles, and by continued consumer resistance to electric vehicles which governments want people to buy. Investment has also slowed affecting purchases of plant and equipment, reflecting a wider unease about growth rates, trade wars and other uncertainties.

The slowdown takes place against a permanent background of intense competition from the digital revolution. Traditional retail faces the onslaught from on line offers led by Amazon and others. Traditional banking and finance has to compete with the cheaper “fintech” models of doing business. A whole range of service businesses are exploring how artificial intelligence and more powerful computers can help them, whilst the modern factory employs more robots than people.

Finding tomorrow’s winners

Revenues and profits are being transferred from the older businesses with their property and staff based ways of doing things, to more modern styles based on mobiles, computers and machine power without physical branches on every High Street. Recognising this change, markets are according higher ratings to the new model businesses and are willing the challengers on to success. China has recently launched its Star exchange to provide a constellation of technology based businesses for investors, seeking to match the huge success of Nasdaq, the US technology based share market.

The US markets have led the world up again this year, with Nasdaq outperforming the wider S&P index given its high exposure to the well supported technology stocks. Success brings with it its own problems. Tax authorities worldwide are discussing how they can tax the leviathans of the technology universe more. So far, they have been able to organise their tax affairs advantageously given the way much of their value added occurs in the difficult to define cloud or in banks of computers that can be located in a favourable tax jurisdiction. Facebook had to report a higher tax charge for the second quarter related to share-based compensation. Individual countries are now thinking of imposing turnover taxes on some technology businesses pending a more global approach to the issue being discussed through the G20.

Regulators rise

The US government has this week announced the opening of a competition enquiry into the behemoths of the social media world and online retailing. The Department of Justice is looking into “whether and how market leading on line platforms have achieved market power and are engaging in practises that have reduced competition, stifled innovation or otherwise harmed the consumer”. The on line retailers will respond that they have greatly enhanced competition, offering lower prices, greater choice and better execution of orders for customers than some traditional retailers. They will point out that if people prefer a traditional shop or find better prices there they can and will use such an outlet. As malls close and retail on High Streets struggles, governments can get drawn into the battle and try to help the established businesses that are suffering from the competitive pressure. It may seem strange that the US has pioneered these large new businesses, in time for their government to start challenging them. It is nonetheless in a long US tradition of establishing world leading companies, only for competition policy to be used to break them up or to establish challengers to them to preserve the vitality of enterprise capitalism. The oil majors and the telephone monopoly faced such actions in past eras.

We are some way off a report, and probably a long way off any major structural interventions. In the meantime, the successful large technology groups continue to grow their revenues faster than most traditional large companies and many of them now convert the revenue to cash and profit for shareholders. Even Facebook, which has to pay a $5bn fine for poor behaviour over privacy and has had to spend a lot on improved control over the use of its platform, has seen good share price recovery this year and is close again to its high in July 2018. Investors continue to buy them as they want some growth for their money and they offer the most growth. We are watching carefully the progress of the online and technology sector led by the US, as so far it has been crucial to this bull market. If governments do eventually find effective ways to tax them more and limit their growth it would be a bad negative for the markets as a whole.

Nothing on this website should be construed as personal advice based on your circumstances. No news or research item is a personal recommendation to deal.

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