Woes have come together in recent days for share markets. As if Mr Trump’s threats of a trade war were not enough, the President has now joined with others in criticising the business model and tax charges of some leading tech companies. After months of leadership by Nasdaq we saw the tech index falling as fast – or faster – than other indices as investors worried about a regulatory attack on their once favoured stocks, and pondered whether various governments will find a way to extract more tax revenue from these businesses.
The pattern of technology leadership was easy to understand. As Amazon grows its market share in retailing so traditional retailers on both sides of the Atlantic lose both volume and margin. They are left struggling to collect enough spending dollars or pounds to cover their large property and staff costs, whilst they see their internet rivals hoover up business with much lower costs by offering lower prices. As Facebook and Netflix gain more of people’s time at the expense of conventional media, so more advertising revenue flows to the new ways of delivering messages, subtracting from the traditional players in the advertising and media worlds. More and more investors wanted their slice of the winners, and wanted to reduce their exposure to the losers. In some cases they were prepared to pay very high prices for hope value, as with Tesla, the company that promotes electric cars but struggles to build and sell enough of them to make a profit.
The recent pattern of general decline in shares reflects worry breaking out more widely. It began with concerns that US interest rates rise might rise too far too fast, hitting all those shares of businesses that had borrowed or were acquired more for their dividend yield which has to compete with a bond yield. The problems at Facebook helped spread the worries into the lead sector. The offer of a free service to individuals needs some method of generating revenue. The use of the data captured from users gave them the way to earn revenue from adverts and other fees. Suddenly, the question of how they can use this data has become the centre of a media storm, attracting hostile examination by various governments. The EU has long been unhappy about US technology giants, as the EU wants them to pay more tax on the eastern side of the Atlantic. There is now a similar demand in some quarters in the US. At the very moment where people feared for conventional businesses like engineering, thanks to steel tariffs, new fears about the success stories of the corporate world blew fiercely.
It is difficult to judge how far Mr Trump will push his tariffs
There are those who say this is just another of those temporary dips you sometimes get in a good bull market. I agree with them when they say the world economy should still grow well this year and next. The feared recession is not yet in sight. Thursday’s sharp rally on reassuring words that the trade tiff might produce a new trade settlement showed this is still a two-way market, and reminded those who had shorted shares that it is sometimes a good idea to bank the profits. There are, however, some genuine worries that may dull the impact of favourable growth on shares and companies.
There is a general mood in the advanced world that profits are high and wages low. There are many who want to levy more tax on success and who wish to see wages higher. Regulation stalks the political arena, as people seek protection from perceived corporate abuse. There is also the tightening of money policy as the Federal Reserve, the Bank of England, the Bank of China and maybe even the European Central Bank ease down the amount of credit and new money in markets. It is difficult to judge how far Mr Trump will push his tariffs as he seeks a better trade deal from China, from the EU and from Nafta. All the time he is on the attack, markets will be nervous and can take it badly.
All this implies that, whilst we are not looking at a banking crash or a world recession and big share slump, markets will be prey to periods of decline and worry. Shareholders have had sustained good times based on the large sums of newly-created money injected into markets by central banks. Fierce internet competition and plenty of supply of new workers having to accept modest pay has created conditions where large and successful companies have been able to boost profits and dividends as the world economy expands. The winners have done sufficiently well to drive the indices upwards, even as more losers from internet competition fall. This year, there will be less created money around and cost pressures are rising for many businesses. We are not changing our base case of sustained world growth and a further rise in corporate profitability. It is going to take some of this good news coming through without so many negative noises about tariffs and regulatory and monetary tightening for the bulls to have a good run again.
The above article was previously published by Charles Stanley on 5th April 2018