Perspectives
29 June 2022
Earlier this year, Amazon issued additional shares to investors. For every one share they owned, they received an additional 19. In tandem with the new issuance, the company reduced the value of its shares to one twentieth of their original value. The world’s largest ecommerce company by revenue had become the latest technology name to undertake a ‘stock split’.
This year, such splits have also been enacted by Google’s parent company Alphabet, electric vehicle and clean energy company Tesla, and the second-largest e-commerce platform in the US, Shopify.
A driving factor behind them is to encourage retail investors to grow their ownership of a listed company by reducing the cost of buying into it through a proportional reduction in the share price1. For tech stocks, whose values have boomed in the past decade and a half – rising on average by twice the level of non-tech stocks over the past 15 years2 – and reached record highs earlier this year3, such splits are especially pertinent. Since Amazon’s last stock split in 1999, its shares have increased by 4700 per cent4.
On the day Amazon announced its split, a different type of share price correction was, however, underway. The Nasdaq 100 index – which comprises some of the world’s largest technology companies, and of which Amazon constitutes 11 per cent – was down by a quarter from the start of the year5. Amazon shares themselves closed at their lowest level in just over two years6. Both were experiencing the effect of a – still ongoing – market correction (one in which tech stocks have been hardest hit7) brought about by tempering economic sentiment.
One of the causes of this market moderation is inflation and concern over the extent to which tighter monetary policies and higher interest rates, enacted to tackle rising prices, will affect economic growth as well as valuation of different asset classes.
Though higher-valued technology stocks have borne the brunt of the market sell-off - as they have generally been perceived to be more reliant on the availability of low cost funding - it is ultimately technology itself, argues Viktor Shvets, Macquarie’s Head of Asia Strategy, and Global Coordinator of Equity Strategy, that will reverse the inflationary trend and resume the longer-term trajectory of strong and ongoing global disinflationary pressures8,9.
Technology’s unstoppable progression, he argues, is disrupting established business models and delivering new levels of industry competition – both at a scale not seen before. Despite recent price and inflationary spikes, technology continues to disintermediate corporates from products, brands and distribution systems, and labour from the fruits of its efforts. The ongoing and long-term effect is to reduce the marginal cost of everything ultimately towards zero, thereby creating and reinforcing a strong disinflationary climate.
Innovation in the current Information Age – which is the period that began in the 1970s and is characterised by the rapid shift from traditional industries established by the Industrial Revolution to an economy primarily based upon intangible assets and information technology10 – is delivering a pace of change ten times faster and at 300 times the scale of previous economic revolutions11.
That pace will accelerate significantly over the next decade, Shvets argues, leading to a third stage of the current ‘technological’ revolution. What started with personal computing and enterprise software technologies in the 1980s and 1990s and then progressed into the consumer digital space over the last two decades, will over the next decade evolve into further disruption of current manufacturing and logistics business models. It will be an age dominated by robotics and automation, new energy and transportation platforms, the metaverse, as well as fusion of infotech and biotech. The ultimate objective is the increased homogeneity of human and non-human contribution, which on current estimates should happen sometime in 2040s.
The rapid progress of the Information Age is further amplified by deep financialization that has placed capital markets as well as asset prices at the heart of modern economies12. While this contributes to numerous negative externalities, it also turbocharges innovation and brings forward each stage of technological evolution at a faster pace by demanding ever larger liquidity and capital generation in excess of the requirements of underlying economies. This ‘excess capital’ implies an inability to consistently raise the cost of capital. Thus, financialization, when combined with extreme wealth inequalities as well as deteriorating demographics, offers another major source of long-term disinflation.
The last three-to-four decades has seen an amazing period of innovation and explosion of new ways of doing things. The resultant breaking down of the conventional dividing lines between who competes against whom and of various industry and occupational lines, has led to much greater labour and product market flexibility. But the economic effect of this disintermediation is the driving of marginal cost and utility of both towards zero, causing significant disinflationary pressures. Given that the progression of technology is now unstoppable, it is hard to envisage a sustained period of high inflation.”
Viktor Shvets
Head of Asia Strategy, and Global Coordinator of Equity Strategy
Macquarie Capital
During a period of rapid change, Shvets argues that companies that are able to leverage certain strengths that outlive cyclical disruption and produce a benefit over the longer term are likely to be the most successful. Among those strengths is the ability to increase productivity at a pace faster than the industry as a whole, in no small part by capitalising on the opportunities presented by technological evolution to reposition their products, brands and operating models. He cites how companies that disrupt and facilitate change, such as Microsoft and Amazon, have made use of new opportunities and successfully diversified into new and adjacent industries, and how companies in what are traditionally not regarded as technology related – such as Adidas, Nike, Ferrari, Rockwell and Mitsubishi Electric – managed to alter their products, design and distribution systems to achieve higher productivity growth when compared to the frontier, no matter what industry one resides in.
However, the greatest returns should be generated in the areas at the cutting edge of technological evolution:
Also, capital goods and commodities required to build the third stage of the current technological revolution will likely emerge as some of the key beneficiaries. The coming decades are likely to be more capital intensive than the preceding decades, says Shvets, as new technologies such as digital hardware and software, AI, cloud computing and 3D printing increasingly move into manipulating ‘atoms’ – re-shaping areas such as manufacturing, distribution and logistics – as well as digits.
The next 12 months promises to be one of the most complex periods for investors to navigate, says Shvets. Those who believe that we have gone through many technological revolutionary cycles before are severely underestimating the impact and scale of changes over the next two decades, he adds. Shvets concludes by saying that the height of the impact could be felt by late 2020s/mid 2030; just in time to usher in a fourth stage of the ‘technological’ revolution.
The Macquarie Technology Summit once again brought together global leaders driving technological change across multiple aspects of business and community.
