The tech sector could be set for its own version of the financial crisis, according to Craig Rippe, head of multi-asset at Canada Life Investments, who says it is abusing its power in the same way the banks did in the run-up to 2008.
The FAANGs – Facebook, Apple, Amazon, Netflix and Alphabet (Google) – have been responsible for much of the growth in the US and world markets over the past five years.
Performance of FAANGs over 5yrs
Source: Nasdaq
James Anderson, manager of the Scottish Mortgage Investment Trust, believes the disruption wreaked by these tech giants on established business models is only just beginning and that he is “90 to 95 per cent certain they will destroy most companies that people think of as safe and secure”
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However, Rippe (pictured) started working in equity markets in 2000 and said that seeing them immediately halve following the bursting of the dotcom bubble gave him “a good grounding in cynicism and a general lack of optimism”.
And, while the manager admitted he tends to be more pessimistic than the equity managers he works with at Canada Life Investments, one subject they agree with him on is the “tech problem” in the US.
“Tech is, I think, 26 per cent of the US market, it has all the cash,” he said. “If you exclude the cash from tech, the rest of the market is pretty indebted and perhaps a bit more exposed than the underlying ratios of the market would suggest.
“I’m a bit worried on a trend view about how tech is going to get treated by the regulator and by the government because I think it has been abusing its position of power in the last five to 10 years as the banks globally did in the past 20 years.
“And I think they are going to find that payback can be quite extended and quite painful and that will lead to a slowdown for the US market.”
Rippe, who is co-manager on several of Canada Life's multi-asset funds, said he wouldn’t like to predict how the US government is likely to rein in the power of the tech giants, but pointed out there are already plenty of levers it can pull, including taxation, fines and anti-trust laws.
He said that what is important is that if you take a step back and ask yourself whether it feels right that these tech giants get more powerful and continue to grow in the same way as they have done over the past decade, there is a strong case for the government to step in.
“How they go about it I suspect won’t actually matter at the end of the day,” he continued. “When you look back in 10 years’ time and say ‘what happened?’, the answer will be they made them less profitable. Whether that is through taking away their free cashflow or breaking them up or through regulating them to death.
“If you look at some of the soundbites you’ve seen from a whole range of politicians in the US, they are all saying the same thing, which is we need to deal with the tech problem. And you are obviously seeing some specific tech names getting hauled increasingly often in front of ever-more powerful committees and really I think it can only go one way from here.”
Rippe said the easiest way for the US government to clamp down on the tech giants would be through taxation and believes it could “just be very crude about it”, for example by taxing revenues instead of profits and preventing the use of loopholes.
His colleague David Arnaud, a senior fund manager at Canada Life, pointed out this process is already underway in Europe and may hint at the shape of things to come elsewhere as well.
“France made Apple pay €500m tax, which is nothing it cannot afford but it is a symbolic measure,” he said. “It’s still a big number.
“Obviously they [France] have made a big noise about it and they said it is for social justice. And you can tell this is a very popular message for a government to have and in Europe there is a discussion between European ministers to go and tax these firms on their revenues not just on their income [net profit], so this is happening in Europe for sure.”
He also highlighted the bizarre situation in Ireland last year when it was sentenced by the European Commission to collect €13bn in tax from Apple, an action the Irish government initially tried to fight.
“You have countries like Ireland that are not so happy because they are attracting these big tech companies to Dublin to create jobs. And the reason they are attracting them is because they are promising they won’t tax them,” he added.
“Eventually they had to collect it, they had no choice. So, in Europe there is a bidding up.
“I think taxation is one thing and regulation is going to be another. Look at the state of the banking sector today, it is overly regulated and that’s the legacy of years of dominant position, which is exactly what is happening with these big tech companies, so I think everyone is seeing that.”
While US president Donald Trump has been a vocal critical of the tech giants – for example Tweeting that Amazon is scamming the post office and that he planned to address the “left-wing bias” of sites such as Google and Facebook – this has yet to translate into any meaningful action. However, Rippe said it would be unwise to take the lead from Trump, adding that his Twitter outbursts are something of a red herring.
“Trump is not a very effective assaulter,” he said. “Getting attacked on Twitter is not the same thing as having a $20bn fine imposed by some regulatory committee.
“Trump is obviously one of the senior people, but I think there are other people on some committees that you don’t know the names of today, but you are going to see end up in the press quite a lot.”
Performance of manager vs peers over career
Source: FE Analytics
Data from FE Analytics shows Rippe has made 61.36 per cent since he started running money in May 2012, compared with gains of 70.09 per cent from his peer group composite.