about 3 years ago • 4 mins
You may have seen a few weeks ago we produced an Insight on Saxo Bank’s so-called “outrageous predictions” for 2021. Well, one prediction in particular – on the regulatory struggles facing big tech firms – struck us as particularly interesting to Finimizers.
So we brought in Althea Spinozzi, a fixed income strategist at Saxo Bank, to discuss this idea further. Althea reckons that tech companies like Amazon, Alphabet, and Facebook are getting a little too big – and that regulators might come a-knocking. She used the evocative idea of Amazon relocating its European headquarters to the tiny nation of Cyprus as an illustration of how hard it will be for these companies to hide if the US or European authorities really come for them – and how all this may hurt their share prices.
Here’s a transcript of the interview. Hit 🎧 in the app to listen.
Andrew Rummer: So, Althea, could you just start by unpacking this 2021 prediction a little?
Althea Spinozzi: Big tech companies in general – not only Amazon, but others as well – have become bigger and bigger during the coronavirus pandemic as the digital economy was getting bigger – and sometimes they’ve become even more powerful than entire countries. So, in these outrageous predictions, what we envision is that Amazon relocates its operations to Cyprus. But there the company has such a large presence. If we look at Cyprus’s GDP, it’s just one quarter of what Amazon makes per year in non-US operations. So having a company like that in Cyprus is just a massive presence. And what we see is that, at that point, Amazon would be able to buy political influence across all levels and advocate for tax rebates, and have the Cyprus government to lobby for the company in the European Parliament.
Amazon would not be able to continue to be a superpower, and to form a tech republic within Cyprus, because the European Union (EU) would get smarter and would understand what is going on in Cyprus. So the next thing that the EU would do is enforce sanctions against the company, harmonizing tax rules, and the US – together with the European Union – would start a fight against this type of monopoly.
Andrew: But ultimately you see Amazon failing in this somewhat audacious bid to outfox the authorities. Why do you think that regulators and governments will prevail over Amazon rather than vice versa?
Althea: We live in a democracy and democracies have been successful for a few centuries now. And the basis of a democratic political system is that every individual has an equal share of power. If we have a superpower rising – that can be an individual or it can be a company like Amazon – that would create an imbalance in the system. And, Andrew, already Amazon is seen as a greedy organisation by many, because it's a company that crushes competition and doesn't deliver to society. Just to give you an example: the profits of the company since 2009 grew from less than $1 billion to $10 billion in 2019. But the amount of federal taxes that that it has been paying is close to zero. So this is a company that is growing successful, but doesn't give back to society.
There is an effort from governments, in the US and also in Europe, to punish these kinds of monopolies. And already we are seeing Facebook being sued by the Department of Justice, we see that today Google is facing a second antitrust lawsuit. So there is a movement towards limiting the power of these companies.
Andrew: So this is something that is wider than just Amazon, then?
Althea: Absolutely. I see Microsoft, Apple, Amazon, Alphabet, Facebook – all these tech giants are running into the risk of being persecuted by the government. And I think that this is a risk not only for big tech companies, but for the market as a whole. Because – as you know well, Andrew – more than 21% of the S&P 500 is weighting within these few tech companies. So if we see a sell-off within the tech space, we see the S&P falling in price – and volatility leaking throughout all the market and other asset classes.
Andrew: So if people listening to this agree that Amazon or the or these other giant tech companies will face a much tougher ride from regulators. How should they adjust investments accordingly?
Althea: Well, if they have been holding big tech stocks this year, well: good for them. But it might be the time to take profits. Otherwise, if they would like to speculate on their prices to fall, they can short the S&P 500 and the Nasdaq. And I would like to highlight an ETF that could be quite good to gain exposure to these sectors: the QQQ, the Invesco ETF that tracks the Nasdaq-100. Around 46% of its weighting is in Facebook, Amazon, Google, Apple, and Microsoft. So definitely, if somebody wants to gain exposure to tech giants, this is the ETF to go to.
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