Technology investors fear increased regulation of US tech companies

Increased regulation of US technology companies is one of the biggest risks to a sector that has led stocks higher, potentially derailing the market's near-decade-long bull run if it suffers a sustained sell-off.

The S&P 500 tech sector has risen 5 per cent in price terms this year, outpacing the S&P 500 which has gained 1 per cent.

Speaking at the Reuters Global Investment 2019 Outlook Summit in New York, Pacific Investment Management Co Global Economic Advisor Joachim Fels said potential increased regulation of social media companies remains one of the major downside risks to higher equities.

"It is something to focus on as a risk because tech has been leading the stock market," said Fels. "It's leading on the way up but also on the way down so that's something to be focused on the risk of regulatory action."

 

New data privacy laws in the European Union have already raised costs for tech companies, but investors think more laws or regulatory action could be in the offing.

Facebook Inc, the world's largest social media network, in particular, has been facing scrutiny in Europe and the United States. Facebook's Mark Zuckerberg was grilled in April for about 10 hours by legislators in the House and Senate to address a scandal that saw data on its users leaked to political operatives.

Lawmakers in both houses, and on both sides of the aisle, raised concerns about whether Facebook could regulate itself. Even Zuckerberg said regulation of his industry is "inevitable" during his testimony. He said the company has taken action to address concerns.

Facebook came under pressure following allegations by a whistleblower that British political consultancy Cambridge Analytica improperly accessed users' information to build profiles on American voters that were later used to help elect US President Donald Trump in 2016.

In addition to concerns by investors and some lawmakers about data privacy and political influence are fears about cellphone use by children, antitrust problems and a broader deterioration of market sentiment.

Market leadership of Facebook and its increased share volatility of late along with that of other social media companies, such as Snap Inc , have kept equity markets at odds over whether a near-decade long bull market can continue.

Hedge funds struggled to bet against market-leading technology firms as their shares rose. And then when many funds took large stakes in Facebook and other so-called 'FANG' stocks, they collapsed in October. Netflix and Amazon.com , which along with Facebook and Alphabet Inc make up the so-called "FANG" stocks. A New York Stock Exchange index of FANG and other related stocks is up 11.8 per cent in price terms this year but fell 7.2 per cent in October.

"The EU regulatory and competition authorities are going to step in," said Kyle Bass, founder and principal at Hayman Capital Management LP, addressing the antitrust concerns.

"This idea of monopoly and monopsony are coming to the forefront of the regulatory conversations, and somehow they're going to figure out how to regulate such things."

The Bank of America Corp fund managers' survey this month found that FANGs were considered the most crowded trade for the tenth straight month. The term crowded trade refers to a widely-held investment seen as especially at risk for outsized losses in the future.

Andrew Left, the founder of Citron Research and a prominent short-seller, said he covered his short position on Facebook, due to its booming Instagram business, but told Reuters he is still betting on a decline in Netflix shares.

Despite the risks, however, some investors think the tech sector is still a great buy.

Shawn Kravetz, president and chief investment officer of Esplanade Capital LLC and an investor in Apple Inc , concedes that the company has its own regulatory risks.

"It's close to a trillion-dollar market cap company. That attracts attention," he said.

But Kravetz said it may avoid the risk of other companies because of its different business model from other technology giants whose "business is monetising you."