- Tech giants’ leadership in the remarkable 2018 round trip for stocks is a good reminder that value created by technology can give us gains, but exposing tech risks can also take profits away.
- The market is correct to be concerned about “trust issues”, i.e. the recent unexpected management disclosures from tech leaders Apple, Google and Facebook.
- The investing public is no longer in the mood to give technology producers the benefit of the doubt, expect increased scrutiny of technology risks across all sectors.
- To avoid future losses, investors should consider incorporating a broader set of investment tools to help identify potential risks from technology, in line with recent moves from ratings agencies.
For investors thinking of buying the dip, we suggest you consider two parallel trends in 2018. In first half of 2018, "FAANG" stocks drove 50 percent of the S&P 500 gains, while deregulation momentum in the U.S. suggested the tech regulation happening in Europe would stay in Europe.
But in the last six months, tech has given away all its gains, and attitudes toward tech regulation in the U.S. have flipped for investors, politicians, the media and the broader public. Tech companies are no doubt currently profitable, but unexpectedly negative disclosures from management at Facebook, Apple and Alphabet continue to fuel investor anxiety.
Tech valuations were priced for the most growth but were not priced for additional risks to that growth – thus they have been the whipping boy of Mr. Market, in a correction that has hit all stocks.
Don't underestimate the lingering negative consequences of this trend. The technology manufactured by Big Tech is used in the operations of nearly all corporations. Most of the time, buyers of new technology aren't concerned with how or why it works, they are interested in the benefits to their productivity and bottom line. However, when questions begin to arise around the long-term costs to those benefits (i.e. loss of privacy, unclear ownership of data, monopoly/inability to switch vendors, etc.), history suggests markets react first and ask questions later.
Note that the bond market has started asking the first questions about technology risks. Moody's recently announced that it will start evaluating organizations' risk relative to a major cyberattack, following S&P's earlier announcement in February that it will also factor cyber and technology risk management into its' ratings decisions. Expect sell-side analysts to continue the trend and take technology risks into consideration when determining target prices for stock recommendations. On our side, we plan to publish a technology risk index to help the investment community utilize a new metric for making investment decisions. The goal is to help investors expand their tool box ahead of more technology regulation likely to be implemented.
The bottom line: one important lesson from the tech-led sell-off is that how companies manage and disclose their technology and cyber risk is now a serious business risk. The management of business risks always impacts long-term shareholder value over time.
2018 represents the evolution of technology and cyber risk from the story of lost customer data, embarrassing public disclosures and the occasional firing of the C-suite. It's now the No. 1 business risk according to the World Economic Forum. It's also the US' biggest threat according to the Pentagon.
The market is selling off because of this shift, and the rating agencies are moving because of it too. Start adjusting your investing tool kit to stay ahead of the broader trend of an increasingly bright spotlight on cyber and technology risk before the regulators do it for you.
If you are looking ahead for the next companies to be in the spotlight, it's likely to shine brightest in those sectors where advanced technology intersects most with our personal safety: medical devices, healthcare, autos and aircraft manufacturers.