The above chart showcases the dramatic rally in relative equity market returns which started around 1990 and continued, with a pause around the internet bubble and crash, to the highest relative return today in the US since the 1960s. The simple explanation for the last nine years of the rally from 2009 could be that the US responded more rapidly and forcefully than Europe or Asia to the financial crisis with monetary stimulus and government support of banks and other parts of the financial markets. Equally important however on the broader move is the dramatic growth of technology companies starting in the 1990s in the US and their influence on the market over the last 30 years, which has also allowed the US to distance other global markets.
Since 2009, Information Technology has added 20% to the overall performance of the S&P. In terms of market cap, from 2009, when IT (excluding FAANGs) represented 15% of the S&P, that percentage has grown to 24%. If we include the FAANGs, the current percentage grows to 37%. By comparison, the MSCI Europe Information Technology Index represented 2.7% of the MSCI Europe Index in 2009 and grew to 4.5% by 2018. In absolute numbers, and using these indices, European tech is now Eur 450 B in market cap, compared to $8.8 T in the US (including FAANGs).
Catalysts for Change
The challenge as always is to project forward and try to address what would reverse this 30- year trend. It is tempting to point towards anti-trust and regulatory risks as potential killers of the big tech names (Amazon, Facebook, Google specifically) that dominate not only their respective markets but also the investing landscape and flow of dollars into the market; fines in Europe for Google and increased media and academic attention here in the US are undeniable. But there is for the time being a trifecta of compelling logic controlling the price action and trajectory of these names in the market—increased market share begets more customer data which begets increased market share and customer data; more data and market share beget greater revenues and earnings beget higher valuation and market cap; market cap landmarks ($1 trillion) and ever greater media focus beget ever greater number of buyers and capital inflows, and so on.
This swirling locomotion has some of the hallmarks of a bubble, most of all the fear of missing out. And, worryingly, it has become almost socially irresponsible to downplay or second guess the dominance of these various companies in our lives, in the economy, even in the use of words like algorithm that have become common currency and are being applied to everything. Who wants to criticize a company like Google, a ‘free’ encyclopedia that allows you to become a handy man, travel agent and master of all information and whose founders consistently bear the hallmark of do-gooders right down to how they structured the initial offering of the shares? How can you criticize Facebook when they are allowing you to connect with people across the globe for ‘free’, while also providing the infrastructure for connectivity in places like Tanzania to enable communication between people otherwise unable to do so? And what’s wrong with Amazon when it reads our mind and finds us things we like that would otherwise go unfound, all the while compressing the prices we pay for same? It’s not cool to hate on these companies. And it is definitely not cool to miss out on their rise as an investor.
While these massive money-spinning machines continue to defy the distant threat of regulatory interruption, it could be from another quarter that the inevitable top arrives--customer exhaustion and subsequent alienation. First, we recognize that its not for free that we have these great learning and customer experiences, and the recent problems with Facebook have illuminated these hidden costs. Do I care that FB has sold or provided without my knowledge my personal data to someone like Cambridge Analytica? In some vague way I recognize that this event may have affected the 2016 elections, but so what? The demand for Mark Zuckerberg’s head will only come when the sale of our data results in some concrete and immediate loss—bank accounts depleted, identity stolen and so on. The notion of owning our personal data is attractive but still too abstract to make a difference now for most people.
The turning of public opinion against the daily utility of these technologies will not happen overnight. But the FB events of the last two months, and the slow awakening by the consumer to how insidious is the reach of Google in manipulating our ‘choices’ will eventually start to gain traction. That may be the beginning of the end of the love affair with these companies, and of their ineluctable rise on the markets. In the meantime, let’s look for ways to invest in the reclamation of our personal data.
Stepping away from technology as a driver of US outperformance, can we imagine a shift away from the US as a geographic destination for capital and towards Europe and Emerging Markets? On a valuation basis, surely. As the chart below shows, the US is nearing historical high spreads on historical earnings multiples vs. Europe and EM.