Will 2021 be the year where regulation stunts the growth of the Tech industry?
The crisis has accelerated many of the digital trends that were already under way. The companies whose fortunes have been most obviously lifted by the pandemic conduct all or most of their business over the internet. Other beneficiaries provide services to the home – from grocery deliveries to suppliers of exercise equipment and home improvement services.
For a large part of 2020, the US stock market rally was concentrated in the winners of the lockdown. That included behemoths like Apple, Facebook, Amazon and Netflix, as well as upstarts, such as Zoom and Peloton - all perfectly designed for remote life. Despite the market’s ascent, it has never felt like the bubble of two decades ago. In contrast to the dot-com era, the companies that moved markets last year mostly had strong earnings, while the start-ups were close to or already profitable.
Evolution of the Technology Sector in the S&P 500
While disruptive companies have the potential to keep growing their earnings by entering new markets and launching innovative products and services, policy and regulation can have a significant impact on their business models. This has been particularly true in recent years in the tech sector where Uber, Facebook, Google and Amazon have all faced regulatory challenges from governments around the world.
Meanwhile, investors are still trying to process the Chinese government’s decision in November 2020 to suspend the initial public offering of Ant Group, the country’s largest financial technology group. From Beijing’s perspective, an unregulated fintech future is one that involves the authorities having to surrender too much control. The EU and US will also have to strike the right balance in regulating the sector to promote competition without discouraging innovation.
Another issue for the large incumbent firms is market saturation. Do they have enough room to continue growing in order to justify their current valuations and the potential for further share price appreciation? For example, nearly 80% of households in the US already subscribe to Netflix, Amazon Prime or Hulu, or a combination of the three streaming services.
Jeff Rottinghaus | T. Rowe Price Investment Manager | Omnis US Equity Leaders Fund
OUR INVESTMENT CASE
Valuations feel stretched for many of the big tech names and with looming stricter regulation, we are cautious on the short-term outlook for the tech giants compared to other sectors.
Furthermore, the announcement of successful vaccine trials towards the end of 2020 triggered a powerful rotation in stock markets. Those sectors that depend directly on the economy reopening – such as transportation, recreation and hospitality – have rebounded strongly while those – such as big tech – that are lockdown beneficiaries have lagged. We expect this trend to continue in 2021, as and when lockdown measures begin to ease.
