SIMON BROWN: I’m chatting with David Gibb, fund manager at Anchor Capital. David, I appreciate your time today. You and your colleagues put out a note last week around tech. I want to delve into some of the details. Sort of towards the tail end you made the point that in 2021 your view was adjusting for risk. In 2022 your theme for tech investing has been sifting through the wreckage, and there’s been some wreckage even in the big tech.
DAVID GIBB: Yes, absolutely. We try and have a theme for each year. We set that theme in January, so it’s not something you do with hindsight. But certainly last year there was this idea of taking some risk off the table. There was lots of speculative activity, a lot of retail-investor interest, strong action in the cryptocurrencies – and obviously zero-interest rates.
We’ve shifted from that to this year, where we’ve got this inflation surprise, and we had another big surprise on Friday where the number was ahead of what people were looking for. So we’ve really moved from adjusting for risk in our opinion, to sifting through the wreckage. The first part of the wreckage we saw was really in the loss-making tech, and that started last year where people decided to take risk off the table – so anything that was looking well out into the future, a big promise from lots of companies on what they would produce in years to come, but where there’s no earnings.
So those companies have been hit extremely hard and it really does remind us of 2000, when we had the internet tech bubble, and then in 2008 where a lot of shares were off 65%, even over 90%.
But what we’ve seen I think really in the second quarter is a big hit to some of the large-cap tech shares. So companies like Amazon have had a very tough second quarter; the share price is off quite a bit. And now we also seeing weakness creeping into Alphabet, Apple and Microsoft.
The big laggards this year in big-cap tech have been a lot of the companies that were real Covid beneficiaries, and those would be things like Amazon, the streaming companies like like Netflix.
Then we’ve obviously also had problems with Meta, with Facebook – partly due to Covid but also because of TikTok and the Apple privacy changes.
So generally softness is coming through in e-commerce, streaming, and online advertising. But we haven’t yet seen adjustments to earnings for a lot of the other companies like Apple and Microsoft, so we are waiting to see if we do have some downward revisions there.
SIMON BROWN: Yes. Looking at the company charts you put out (see below) in terms of three-month year to date 12-month performance, Netflix, [has been] the absolute standout in terms of losing. But if we look at the Facebooks, the Apples, the Amazons, the Alphabets Microsoft, I appreciate that some of the Covid boom is now behind them and some of that pull forward stays. Some of it fades its way out as well. What about regulatory issues? There certainly is a little bit around Meta, a little bit around Amazon, even Google – but not really Microsoft.
The performances of the FAANGM stocks in 2022, % change
Source: Anchor Capital
DAVID GIBB: Look, Microsoft went through its regulatory troubles just over 20 years ago. That was around 2000. In some ways Microsoft is kind of put to the side in terms of regulation because it has been through that. Look, Microsoft is definitely doing things that it shouldn’t be doing. I mean, they’ve recently had scrutiny from the European Union on locking people into some of their cloud contracts. So they do have a slightly different approach now. Their head of legal, Brad Smith, said well, I’m sorry for what we’ve been doing, but we will adjust our behaviour.
But I think the companies that have drawn the most ire have generally been Amazon, Meta and Alphabet. There’s no question that Europe has tended to lead with regulatory action, so we are expecting the Digital Markets Act and the Digital Services Act, which are both bills that have been passed in Europe. They come into effect in 2023 and 2024 respectively – the DMA and the DSA. Then what tends to happen is other countries have been following the European lead and I think now with the Biden administration there’s quite a lot of interaction between the regulators in the US and Europe. So we are also seeing a lot more progress in the US, and there are bills that are working through Congress.
One in particular, the American Innovation and Choice Online Act – which is really how you deal with the platform companies and anti-competitive behaviour on their part – that is working its way through Congress. Obviously there’s a lot of negative reaction from big-cap tech. But I think regulation is presented to us in the EU and in other countries like Australia, even in Japan and I think it’s on its way in the US. We don’t want to lose track of that.
SIMON BROWN: Let’s quickly shift to China. I actually saw some charts over the weekend that were showing China big tech Hang Seng-listed, sometimes New York-listed, typically doing better than the US. We’ve got the likes of Alibaba, which has actually bounced quite strongly off the lows. We’ve got reports that DiDi will be allowed to list again and therefore get open for new clients. There were 60 games approved by authorities last week, although none for Tencent. Is that perhaps – I don’t want to say an end of China sort of stamping on the tech stocks, because that would be dangerous – but a glimmer and perhaps an opportunity?
DAVID GIBB: Possibly. I think China has been, as we describe it, like purgatory, really, for international investors, particularly in the tech space. With so much control now vested in the president, he might change his mind on certain things. So it’s difficult. I think the point we like to make is that pragmatism is no longer the leading driver of these decisions in China. Historically under previous leaders growth came before politics. That has changed now, so it has made the situation more unpredictable.
But coming back to the comment about the fact that Alibaba in fact has done better than all of the big US tech companies this year, it’s really a discussion about the base. The base was so low. And if you sort of took out and you did a sum-of-the-parts on Alibaba, and you gave a value for Alibaba Cloud, which is the leader in China, you end up with a PE around 10 times on their online retail business in China. That has just rerated now from, say, 10 times to 15 times in the last couple of weeks. So the share is up over 40% just in the last few weeks. I think it became value tech, and it’s done well this year, pretty much like Hewlett Packard or IBM have done well this year. The same would apply to Tencent. The multiple was just so low, It hasn’t done as well as Alibaba this year, but it’s really a value tech situation.
I think the other thing is that inflation is much lower in China. The last reading was just over 2% compared to 8.6% in the US. So there is a lot of room for stimulus, although obviously China’s been reticent to come with too much stimulus, partly because the Covid situation is not completely under control there.
SIMON BROWN: A quick last question. The watchword, words perhaps – caution and profitability perhaps, two points.
DAVID GIBB: Yes, absolutely, Simon. We are conscious of the durability of company earnings. That is certainly a driver, so we need to watch out for downgrades. So try and invest in areas where you feel the earnings are more secure.
SIMON BROWN: We’ll leave it there. David Gibb, fund manager at Anchor Capital, I appreciate the time.
