Riding the backlash

Where multi-nationalism and free trade were once seen as key to the global economy, countries are now retreating behind national and ideological walls. In 2018, the Trump administration banned the Chinese tech giant, Huawei, from doing business in the US. This was more than just political chest beating, it sent a clear signal that we are entering a new era. In a future that will be dominated by technology, data and A.I., the Trump administration decided that giving a foreign technology corporation access to its communications network was a threat to its national security (and, no doubt, its own tech industry).

A relatively small group of US superstar firms have become the driving force behind the growth of the US stock market. Investors ride on this wave of positive sentiment towards backing well-known household names with unquestioning exuberance but can these superstars maintain this positive pace and continue to fulfil expectations? A tough challenge for any company, especially ones who command such loyalty.

National security is not the only perceived threat to the superstars. At the heart of the issue is access to data and it’s here that governments and regulators are getting increasingly nervous. There is widespread pressure for regulation and initiatives such as GDPR in Europe have tightened the rules about data collection and usage considerably. As the prime movers in the digital revolution, it’s the superstar technology companies who are facing the tightest scrutiny.

The fear is that these superstar firms possess too much power with little obligation to use it responsibly. These businesses hold an unprecedented level of information and insight into our lives and they have technology embedded into our homes with the potential to mine even more. Big Brother may not be watching us but there is a niggling suspicion that Alexa and Siri might be.

Are there signs of a ‘techlash’? Perhaps. There has certainly been a reaction to the increasing hold the tech companies have over our lives. The US and Chinese tech giants are accused of monopolistic practices, that they have used their market dominance to stifle competition and locked us all into their fiercely guarded platforms. Recent revelations about shady practices in the past, not least in the tech giants’ tax arrangements, have only added to the calls for regulation.

There are strong signs that the political landscape is changing. Switch on the evening news and the talk is of trade wars as the U.S., China, the EU, UK and most other major trading powers re-examine existing trade agreements.

A smaller group of companies have become dominant in certain sectors and the weight of the superstar firms in the US economy has grown. With this has come a fall in the overall share of GDP going to labour cost and this reallocation of capital at the expense of workers pay-packets has contributed to rising income inequality and a potential political hot-topic come November elections.

Protectionism is once again on the global agenda. And the superstars may find that their ability to grow and increase profits is blocked by threats of tariffs, ‘tech taxes’, regulation, fines, antitrust investigations and, in some cases, enforced fragmentation. It may become harder for them to retain their foothold in existing markets and penetrate new ones.

What does this mean for investors? What we are seeing is national and regional governments and regulators consciously trying to promote local, home-grown competition to the big global players. While obstacles are put in the path of the superstars, local favourites may enjoy overt or tacit government favour.

All is not gloom for the global tech giants, far from it. Governments are still courting them as they realise they need them for major infrastructure projects such as 5G. They bring employment and economic growth, as well as having impact on important societal issues such as education, environmental protection and health. The digital revolution will only accelerate and it’s the tech giants who are best placed to deliver it. The tide can always turn back again.

What’s clear is that the superstar firms will need to tread carefully in balancing the needs of local and global markets and their future performance depends on their ability to adapt.

At BNP Paribas Asset Management, we take a highly informed approach to investment, analysing the economic, geo-political and commercial factors before making investment decisions. We look at the issues, both from the viewpoint of companies and countries in order to assess stock options and investment suitability.

Our investment teams will be closely monitoring both the established players and the new contenders who are poised to take advantage of the new commercial environment and prudently adjusting portfolios accordingly to take into account the changing dynamics of where Superstars will emerge from next, whether small or large.