Macro

The technology “war” has only just begun and will get worse. Big tech firms face numerous headwinds. Increasingly the tech giants are viewed as monopolists that are stifling smaller players, not paying their fair share of taxes, and facing too little regulation. We could well be heading into a new tech era with “splinternets” and greater regulation. As has been well documented the US big 5 tech companies have been adding a disproportionate share of return to the S&P 500 with many suggesting this is a “bubble”. As the chart below shows these publicly listed large tech companies are both over-earning and overvalued. 

 


The ongoing tariff war between the US and China is facilitating the great internet divide that is bounded by the Great Firewall of China. This division of the internet (Chinese vs the rest of the world) will provide stark choices for participating countries and their economies. The first and crucial decision is which internet to base their culture and economy in (it is a straight either-or decision). The splinternet is already here and evidenced firsthand on the ground in our travels.

There will be two global knowledge repositories. The rules for the evolution of these repositories reflect the command and control ethos of China vs the free-market approach of the US. It appears that the mechanism to politically, economically, and especially technically recombine these knowledge repositories will not be available for many generations to come. The implications of this include: a lack of mutual access to innovation, reduced market competition, higher prices for IP-driven services and technology, and significant supply chain dislocation. The direct consequences of this for investment markets are: higher inflation and lower economic growth, and weaker investment returns. 


The above must be put in conjunction with the technological advancements in knowledge management and automated decision-making. These developments will drive significant changes to the labour market and deliver both superior resource efficiency and allocation. The automated decision processing technologies such as those found in advanced avionics and defense applications will increasingly feature hand-held communications devices, with personal agents taking on mundane decision processes such as the purchase of a travel ticket, and even deciding which house to buy. As established artificial intelligence capabilities are deployed for personal use, the capability to replicate human activities at scale will increase exponentially. In China, this is already established today through a state-sanctioned technology plan (which includes social media, online payments, email, and other internet access). 

China has become a global leader in algorithm development, machine learning, and image detection. Collectively, these technologies provide improved event prediction, decreased waste, better logistic management, and more efficient resource allocation. The downside is that the deployment of these technologies will likely emerge differently in Western economies, where there is stronger resistance to state intervention.


There are several implications of the rapid technological change. Perhaps the most important is to realize that technology is here to stay, and we must rapidly adapt. For portfolios, single sleeve investments are key. China must be part of a portfolio and invested by an active, on-the-ground manager who understands the “new” China and is accordingly investing in those companies that will be able to sustainably deliver solid returns over the long haul. The Chinese stock market has rich pickings for the well informed!



Author's note: Koda's Head of Managed Funds Research and I have recently returned to Australia from an exhaustive research trip to Asia, Eastern & Western Europe, the UK and India. Over the three week trip we met with a number of fund managers, industry and policy experts, as well as economists to form our macro view and to be able to best position client portfolios.

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John Forest

"the command and control ethos of China vs the free-market approach of the US." My concern is that falling market regulation is resulting in command and control by the larger players which will become difficult to dislodge and destabilising for any coordinated response (don't move oil, iran and venezuela outside the tech impact)

Pamela Samdon

What suggestions for an Australian seeking to take up your advice. What funds do you recommend with that active on the ground knowledge