"Transient" inflation impulse and increasingly eager competition authorities?

"Transient" inflation impulse and increasingly eager competition authorities?

17 August 2021 from Mikael SydingReading time: 5 minutes

In the US, the proposal OAMA "the Open App Markets Act" is currently being discussed. I have long talked about the growing zeal for regulation and the fact that legislators are increasingly looking for ways to limit the monopoly shapes of the technology giants. Yet OAMA comes almost as surprisingly as when the first observed interstellar object, Oumouamua, visited our solar system a few years ago. Oumuamua's strange shape and movement patterns also led serious researchers to speculate about aliens. And now with Oama, serious businessmen are speculating about a notch in the curve for Apple's and Alphabet's hegemony.

The bill means that companies that provide and control operating systems must allow apps and app marketplaces from companies other than themselves. Both Apple and Alphabet have tried to stop the law by halving their fees for small customers from 30% to 15%, but it was obviously too little and too late. The law also allows software companies to tell you that their apps are available at lower prices than Apple and Alphabet's official app stores, and to prevent Apple and Alphabet from using non-public information that only they have access to about their users and app companies. Of course, Google and Apple do not like this at all. Their app marketplaces are hugely profitable as they have been able to charge a 30% fee for millions of apps that other companies develop and market there. On the other hand, we have companies such as Epic games and Spotify, where the latter has already officially given the proposal its wholehearted support

It has long been profitable to invest the money in the triple-A companies (Apple, Amazon, Alphabet) plus some of the largest companies, such as Microsoft, Facebook and Tesla. The companies are growing rapidly and in addition to Tesla, they have obvious economies of scale that provide both increasing margins and increasing dominance in their respective sectors. Inflows in passive index funds in combination with record volumes for call options have pushed up the prices of the largest companies much faster than the companies' fundamental value creation (ie sales, profit and cash flow). It would be presumptuous to predict an end to the trend, but the market does not usually appreciate when politicians go to the favorite companies, especially not when the valuation multiples are strained. "Priced to perfection" implies that no imperfection such as aggressive regulators may crush the machinery.

There are more variables that could contribute to a sector rotation from the billion-dollar club to, for example, a little more traditional technology companies. At present, high growth figures are reported for both GDP and consumer prices (“inflation”). As the growth of the technology giants is largely considered secular and relatively independent of GDP growth, inflation is the most interesting. High inflation is normally not good for companies with high valuation multiples, so there is definitely reason to consider whether it is not time for the highest valued companies to correct downwards for a while - especially those that the authorities seem to take extra aim at, ie Apple Alphabet and Facebook.

At the same time, the inflation impulse is considered to be transient. However, it remains to be seen how consumer prices and wages will develop in practice, they may well reinforce each other in a positive spiral. "Transient" also means in these contexts probably at least twelve months. So you should hardly hold your breath in anticipation of a lower rate of price increase. Agricultural commodity prices, for example, are still pointing straight up. On the other hand, GDP growth is expected to lose pace sooner than that. What then happens to the AAA or FANG (including Facebook, Netflix and thelike) companies when consumers' desire to buy and the US economy slows down due to the lack of Covid checks, at the same time as inflation is high and bloodthirsty competition authorities knock on the door? I prefer to avoid holding the shares to see the result, but rather look for other alternatives.

Of course, it is not easy to choose the right company in a correction, but if you are looking among long-term winning industries in other technology sectors than software, social media and advertising companies such as Alphabet, I think of Industry 4.0 and 5G. I have written about both of these before here on Vontobel's website and the reasoning and conclusions still apply to the highest degree. Both indices and tracker certificates provide a reasonably broad exposure to real technology companies that are the ones that will create the highly automated world of the future. Without 5G and without machines that talk to each other, we will not be able to take part in the increase in productivity we have become accustomed to since the industrial revolution began. But with 5G as support for the 4.0 vision, productivity increases can even increase again to ancient days.

One question in this context, however, is whether we even have time for either a slowdown, inflation-related exchange rate corrections for the FANG companies or disinflation, before a possible next wave of pandemic restrictions strikes, with predictable stimulus packages as a result. In such cases, it will probably just be more of the same thing we are already used to: AAA breaks new market value records, “meme-stonks” like AMC will surprise and upset and create as undeserved fortunes as ruin. But even in that environment, the 5G and 4.0 companies should do well, they are healthy investments in the long term, and they are not exposed to the same regulatory risk as Apple and Alphabet are right now. If you think it will be a new wave of shutdowns, you can also throw a little Spotify in the portfolio as an anti-AA bet.


@Mikael Syding

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16/08/2022 05:38:10


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