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Technology leads the markets up again

John Redwood, Charles Stanley’s Chief Global Strategist, looks at the recent developments in the technology sector.

Phone apps

John Redwood

in Features


The long bull market of recent years was led positively and strongly by the technology companies. This meant US leadership in world markets, given the dominance of the large US technology companies in most parts of the world. In the sell-off at the end of 2018, these same companies helped push the markets down. Investors grew nervous about the possibility of a recession brought on by too much monetary tightening in the US and China. They also expressed concerns that the digital revolution companies were going to be hit by higher tax charges, more regulations, and by customers tiring of some features of their complex data driven business models. The Facebook share price fell strongly when people queried its commercial exploitation of their data and when it lacked control over some of the materials posted on its platform. Apple shares fell on concerns that people were no longer rushing to buy the latest new iPhone product. Amazon faced demands in various locations for a new deal to help traditional retailers at its expense.

The dive in markets was ended by a change of stance from the Federal Reserve Board. The decision of the Fed to ease off interest rate rises, and to nuance its language over the pace at which it would retire its bond holdings and shrink its balance sheet, helped markets rally. China too at the same time made more moves to abate its squeeze on credit and activity. Recent days have seen many of the US technology giants report their results to the end of last year. These have mainly confirmed the established pattern of modern business. They show continuing strong revenue growth, and in many cases this is now being converted into higher profits and cashflows, despite the need to employ more people to improve service and meet increasing demands from regulators.

One feature which seems to sustain Alphabet’s Google and Facebook is the ability to provide a service which is free to users, paid for by advertising. Despite the attempts of critics to antagonise people over the way these companies use personal data they have acquired to improve the targeting of the adverts, many users take the view that as they get the service free they have to accept the company will make money on adverts. Other users are considering switching to paying for the service, which enhances the revenues of the technology company but also changes the relationship with the customer and may have an impact on the advertising activity.

The underlying feature investors need to acknowledge is the public is still in love with a lot of the technology and wanting more of it. Online retailing is flourishing at the expense of traditional High Street shopping. People like the fact they can do it any time from the comfort of their home or office, and like the ability to compare products and prices easily prior to purchase. In the latest UK figures, online retail now accounts for around 30% of non-food purchases and is still growing at the expense of shop-based buying. Online advertising is an accepted part of our lives, and to some it is a positive if it can draw your attention to offers and products that do interest you and help you buy them cheaply and in a timely way. More services are also being offered or processed on line, with advantages to supplier and client. This creates a world where revenue transfers from traditional businesses who are not adjusting, to new challenger and technology-based companies. Alternatively, it forces change on existing businesses which have to increase costs by offering a good on line alternative to their older approach.

The car industry is being disrupted by a different kind of change. Governments and regulators have recently altered their opinion about the “clean” new diesels they have required under progressively tighter regulations. Many now want a faster conversion of the industry to electric cars. This is seeking a product which so far has not proved popular with most of the public. Motorists think many of the electric cars are still too dear, are concerned about the short range of many of these vehicles and the long charging times for the typically-large heavy battery they use. Governments are seeking to subsidise them to make them more enticing. They have not announced any additional way of taxing the electricity they use, so giving them a big tax advantage over petrol and diesel cars where the bulk of the energy cost is tax. They are assisting the industry experiment with new approaches that extend the range and cut the charging time. The public worry that as the electric car becomes more common, so governments would need to find an additional tax on it to replace lost tax revenues from fuel burned by conventional vehicles.

Not all technical change makes money, but most technical change can have an adverse impact on existing companies that misread it. For the time being, markets are rallying in the belief that there will be no recession. They are also rising on the assumption that, whilst the technology giants will continue to grab market share and revenues from older businesses, the winners amongst them will turn this into shareholder value for their own backers. This is sufficient to send the main US index higher, with favourable consequences elsewhere in the world.

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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