Technology remains the economic driver of the future, despite recent data access scares
John Bilton says recent jitters in tech stocks is natural, as we start to acquire an understanding of data’s role in the information age. Technology is still outperforming other economic sectors and is the best bet for continued global economic growth
Over the past couple of months, we’ve seen Silicon Valley lose some of its sheen. Casual watchers of the tech phenomenon could be forgiven for thinking that, for all the talk of intelligent robots, sentient algorithms and autonomous vehicles, technology’s wheels have rather come off. But for all its recent travails, global technology remains the best performing sector of 2018, outperforming its nearest rival (the consumer discretionary sector) by 2 percentage points.
FAANG (Facebook, Apple, Amazon, Netflix and Google) stocks may have retreated from their 2018 highs, but are still up almost 6 per cent year-to-date, compared to the Morgan Stanley Capital International All Country World Index, which is roughly flat. So how should we think about technology today? Dotcom bubble 2.0 or a structural trend?
Widespread technology adoption is a structural theme affecting all industries. Comparisons with the dotcom era of the late 1990s are inevitable but can be misleading. Certainly, the tech sector has led throughout the post-global financial crisis period, with the Nasdaq beating the S&P 500 by more than 200 per cent in the nine years since the crisis. But the dotcom bubble was of a wholly different order, with the Nasdaq beating the S&P 500 by more than 760 per cent between 1995 and 2000.
More important than price, though, is valuation. In the dotcom bubble, valuation measures were stretched to the point of absurdity; today’s tech valuations are above those of the broader index, but more anchored in reality. Instead of valuing ideas – and dreaming up outlandish new metrics to explain them – we are now valuing real businesses with real cash flows and real earnings. In short, if the late 1990s were a proof of concept, today’s technology boom is the implementation phase; the implications of which are profound for both the sector and the economy as a whole.
To a degree, the recent jitters in the tech sector can be thought of as growing pains. Innovation, by its very nature, runs ahead of the crowd but, as it becomes more mainstream, there will inevitably be scrutiny. Recent headlines over data access and usage are just one example of this. To make an analogy, data is to an information economy what oil is to an industrial one. Hitherto, data was essentially treated as a free good, but this is changing rapidly. Oil certainly isn’t free and even today the price discovery mechanisms that govern its value lead to market gyrations that have widely felt implications.
The price discovery for data is only just starting, and while we know that data isn’t free, it remains unclear what the clearing price should be. Such cost uncertainty is rather new for the tech sector and the market is digesting the impact on earnings over the longer term. Nevertheless, the impact of a sector-level issue on the wider stock market underscores the progression of technology from an industry disrupter to a powerful industry in its own right.
At a macro level, both the influence and size of the technology industry have profound implications. Over the long term, technological developments tend to lower costs and boost productivity but the mechanisms by which this happens – especially in an advanced, service-based economy – are rather nuanced. Technology can also be seen as a disinflationary force and automation – or, put another way, labour substitution – should be expected to flatten the Phillips curve (the inverse relationship between inflation and unemployment) and mitigate the inflationary pressure of full employment. There are also positive implications for productivity; and while a technology-led boost to productivity cannot be predicted, it would be unusual for productivity to remain stuck at its prevailing low level at the same time technology adoption accelerates across all industries.
Having explored the possible long-term impact of a technology-led productivity boost to global growth, we believe it has the scope to boost developed-market GDP by up to 1.5 per cent. Even if this accrues slowly – at a pace of 0.1 per cent per year for the next decade – it could add more than US$6 trillion to the GDP footprint of the major economies by the early 2030s. That would be the equivalent of adding another Japan to the world’s economy.
In the more immediate term, even sectors with secular tailwinds must nevertheless navigate earnings seasons, and the first quarter 2018 US reporting season is shaping up to be pivotal. Given the recent news flow, reassurance about technology company earnings would go some way to quell investors’ fears.
John Bilton is global head of multi-asset strategy at J.P. Morgan Asset Management