Pitchforks into Plowshares

by | July 26, 2021

Investors have had a love affair with growth. 

Since 2007 growth has outperformed value by over 200%. That’s not the way it is meant to be. Rational behavior should equate returns, adjusted for risk. If anything, value shares ought to be at least as risky, if not more so, than growth ones. Yet value has been pummeled for over a dozen years.

Over shorter time horizons, value and its companions, cyclical and smaller capitalization stocks, have been able claw back. This year, as vaccination prospects have boosted global growth expectations, value and cyclical stocks have enjoyed a good run. But at the first sign that things might go awry, investors flock back to their tried-and-true growth stocks. 

Fancy gadgets, the allure of innovation and market dominance underpin investor fascination with growth. Yet coming out of the shadows is a hitherto unforeseen risk, namely that governments, using their powers of taxation, antitrust, regulation and anti-globalization, may tarnish the prospects of the leading growth companies, specifically those in information technology.

Investors need to be aware of that risk. And technology giants would be well advised to address the sources of that risk, lest they cede their fortunes to those who would otherwise shape their futures.

Skepticism, even hostility, toward dominant tech firms is not new. Over the past two decades the European Union has wielded its antitrust and anti-competition tools against big tech. More recently, various European countries have proposed tech taxes on multinationals. To head off a tax free-for-all, Treasury Secretary Yellen has cobbled together a global agreement on a 15% minimum corporate income tax rate. 

Meanwhile, China has banished many western technology firms beyond its ‘great firewall’. And when some of its own technology companies have annoyed Beijing, it has clamped down hard, punishing those that have gone against its will to list their shares abroad.

Tech anger intensified after 2016. Fears that the Brexit vote and US Presidential elections were tarnished by ‘unsocial media’ highlighted the risks to democracy posed by dominant tech firms. A wary US began to see Chinese technology companies as adversaries rather than legitimate competitors. And the vast wealth of tech billionaires, who today are literally reaching for the heavens on their rocket-ships, has added to public resentment.

The pitchforks are coming out. 

The Biden Administration has jettisoned the traditional fascination of the Democratic Party with information technology—and the vast sums it provides to campaign financing. Biden’s team is shoring up the legal, tax and bully pulpit tools to take on tech giants. The new chairwoman of the Federal Trade Commission (FTC), Lina Khan, is a recognized scholar in technology antitrust. At least six bills await in Congress to curb tech company practices.

So, should investor now dump growth? 

Not so fast. 

The Biden Administration faces an uphill battle in legislating higher taxes. A global tax treaty requires a two-thirds majority for ratification in the US Senate. Never mind Republican opposition—even Democrats are split over taxes.

Breaking up big tech companies won’t happen anytime soon. US antitrust legislation rests on the presumption of harm to consumers. By offering free services in search or social media, or aggressive discounting via online shopping, technology giants hardly come across as consumer rip-offs. Concerns about undue political influence or disregard for privacy are more legitimate, but those forms of antitrust would require new legislation, subject to constitutional court challenges. That could take years, even decades. Just ask the tobacco industry…

There is little doubt that arrogance, hubris and obscene wealth are the new faces of information technology. The well of social media has been poisoned. Predatory practices of buying of nascent competitors is flat out wrong. In the court of public opinion, as opposed to forum of public markets, technology companies are more despised than admired. 

Yet even their harshest critics must acknowledge that technology products and services are in great demand for legitimate reasons. Importantly, many of the benefits to consumers are reinforced by size, even by the absence of competition. Social networks and search are best served by single entities, rather than numerous competitors. Economies of scale in logistics require heft in online retailing. Software platforms work best when there is a uniform standard, rather than many different ones. 

Competition, at least in its traditional sense, may not be best for the users of information technology. Size matters because it benefits consumers, not just producers. 

Yet with size comes responsibility—to all stakeholders. Companies can either recognize that fact and act accordingly, or have it imposed on them by increasingly hostile governments and the angry voters they represent. 

Shareholders would do well to acknowledge that the value of technology resides not merely in its business platform, but on the ability of the company to accommodate the needs of workers, suppliers, communities, governments, and society at large. It starts with paying taxes. But it does not end there.

The pitchforks are out for technology companies. Yet as the ageless saying goes, pitchforks can be turned into plowshares. Responsible companies, and those that own them, would be wise to shape their own future rather than having it shaped for them by others. If corporations and their shareholders can respect the legitimate concerns of the communities that make their fortunes possible, they will recognize that accepting responsibility can ensure their long-term success.

Therein resides the genuine value in growth.

About the Author

Larry Hatheway has over 25 years experience as an economist and multi-asset investment professional. He is co-founder, with Alexander Friedman, of Jackson Hole Economics, LLC, which offers commentary and analysis on the global economy, policy & politics, and their broad implications for capital markets. Prior to co-founding Jackson Hole Economics, LLC Larry worked at GAM Investments from 2015-2019 as Group Chief Economist and Global Head of Investment Solutions, where he was responsible for a team of 50 investment professionals managing over $10bn in assets. While at GAM, Larry authored numerous articles on the world economy, policy-making and multi-asset investment strategy.

Larry was also the lead investment manager for various mandates, funds and an actively managed multi-asset index. Larry also served on the GAM Group Management Board, was Chairman of the GAM London Limited Board and served as member of the GAM Investment Management Limited Board. Larry was also Chairman of the GAM Diversity & Inclusion Committee. During his tenure at GAM, Larry was based in London, UK and Zurich, Switzerland.

From 1992 until 2015 Larry worked at UBS Investment Bank as UBS Chief Economist (2005-2015), Head of Global Asset Allocation (2001-2012), Global Head of Fixed Income and Currency Strategy (1998-2001), Chief Economist, Asia (1995-1998) and Senior International Economist (1992-1995). During his tenure at UBS, Larry was also a standing member of the UBS Wealth Management Investment Committee. While at UBS, Larry worked in Zurich, Switzerland, London, UK (various occasions), Singapore and Stamford, CT.

At both GAM Investments and UBS Investment Bank Larry was widely recognised for his appearances on Bloomberg TV, CNBC, the BBC, CNN and other media outlets. He frequently published articles and opinion pieces for Bloomberg, CNBC, Project Syndicate, and The Financial Times, among others.

Before joining UBS in 1992, Larry held roles at the Federal Reserve (Board of Governors), Citibank and Manufacturers Hanover Trust. Larry Hatheway holds a PhD in Economics from the University of Texas, an MA in International Studies from the Johns Hopkins University, and a BA in History and German from Whitman College. Larry is married with four grown children and a loving Cairn Terrier, and resides in Wilson, WY.

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