It is not usual for the Bank of Spain to focus on an economic sector over which it does not have any type of direct supervision. Even less if that sector has a low or no presence in Spain. However, it has just done so with the United States technology sector, due to the high weight that the giants of that industry have in the stock markets and the effect it can have on a global scale if there is a setback in their prices. In fact, he compares this possible scenario with the bursting of the “dotcom” bubble at the beginning of the century.
The Spanish supervisor focuses, above all, on the seven big technology companies in the United States – Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla – and the drag effect they can have. It indicates its weight in the major indices. For example, in the S&P 500 they can be up to 45%. This index has appreciated 132% since 2019. If we look only at the advance of the technological Nasdaq, the takeoff has been 220% during the same five years.
The Bank of Spain compares it with what happened two decades ago. Between 1996 and 2000, the rise of the S&P 500 was 147% and 716% in the case of the Nasdaq. Then, “abrupt” corrections occurred, because the stock market valuations of these companies “were unsustainable” and this moved beyond the stock market. The impact was “relatively contained” in the US economy due to the sector’s low level of debt, the banks’ limited exposure to it and because the shares were, above all, in the hands of high-income people. Despite this, the United States experienced a “mild recession” between March and November 2021 and the contagion effect jumped to Europe, where a “significant economic slowdown” occurred.
If that happened with the “dotcoms”, now the big technology companies are different, because they are larger and more consolidated companies, “with high network economies” and “the ability to customize their products, which makes their tendency towards concentration very intense,” explains the Bank of Spain. This also has a negative side, because this concentration “increases the potential systemic impact of the materialization of risks.” He cites, for example, that Apple, Microsoft and Nvidia currently account for around 20% of the S&P 500 index, well above the value recorded by the three largest technology companies at the peak of the bubble in the 2000s.”
The risks of ‘tech’
The Bank of Spain does not say that there is currently a bubble in the valuation of technology companies. It does highlight that “the current high level of technology stock market prices poses some risks of abrupt corrections” and mentions different risks that could lead to a downward revision of their market valuations. Among them, he mentions that the profits of technology companies do not grow at the rate that investors anticipate, because it is already perceived that the shares “show great sensitivity to the publication of economic results.”
This is what happened with the chip manufacturer ASML, which a few weeks ago plummeted 15.6% after presenting figures that were not as positive as expected. The same thing happened in February and October 2022 when Meta fell 26% and 24% after publishing its financial figures. Other risks mentioned by the Spanish supervisor are in possible regulatory changes, problems associated with global supply chains, such as those experienced in recent years, and that can be repeated in a context of “high geopolitical tensions and trade conflicts.”
It also cites as possible risks, that these are companies that are very intensive in the use of energy and that the share price of technology companies is “very sensitive to changes in the macrofinancial environment”, as they are securities where the expectation of profits weighs heavily. in the future. “A lower-than-anticipated economic growth or higher-than-anticipated inflation” that leads to an increase in interest rates “could have a differentially negative effect on the share prices of this sector,” he concludes. However, it is not easy to see a deterioration in the credit quality of these companies, because they have a high level of liquidity on their balance sheets.
Investment funds, the most exposed
From there, the Bank of Spain lists who would be the hardest hit, among shareholders and investors. Not only those directly exposed to these stocks, because the effect of a correction would be broad. “The fall in share prices could spread to other companies and markets, such as European ones” due to possible “accelerated racing sales.”
If we go into detail about the ownership structure of technology companies, more than 54% of the securities are in the hands of investment funds and close to 30% in the hands of minorities, especially individual investors and, mainly, Americans. That is, the funds would be much more exposed to a stock market failure of these companies, which would be contained in the case of banks and even more so in European banks.
However, “the potential amplification effects through investment funds could be comparatively more relevant, in view of the high holdings of shares in the hands of these intermediaries,” he warns. “Although the most important effects would foreseeably occur in the United States, taking into account the high interconnection between financial markets, significant impacts would also be expected on a global scale,” he summarizes.
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