Markets dismiss regulation risks


Stephen Miller

The US Federal Court decision to dismiss an anti-trust complaint against Facebook this week saw that company catapulted into the $1trillion market cap club (along with Apple, Amazon, Microsoft and Alphabet). That represents a dismissal of sorts by the market of regulation risk motivated by anti-trust measures designed to attack the perceived ‘oligopolistic privilege’ enjoyed by tech companies in particular.

Tech companies are far from flavour of the month on both sides of the aisle in the US Congress. Indeed, the Facebook decision further calls for Congress to update the nation’s antitrust laws with a leading Republican on the House Judiciary Committee, Rep Ken Buck arguing that the decision “shows that antitrust reform is urgently needed” and that “Congress needs to provide additional tools and resources to our antitrust enforcers to go after Big Tech companies engaging in anticompetitive conduct.”

Last week, the committee advanced a package of landmark bills that would empower antitrust regulators at the FTC and the Justice Department to break up Big Tech platforms such as Apple, Amazon, Microsoft and Alphabet.

Perhaps because like taxation the prospect is ‘well down the track’ markets have not yet bothered assessing its implications.

Thus far, and despite the occasional wobble, markets have taken this risks in their stride and may well continue to do so, particularly if tailwinds from policy remain supportive. Nevertheless, they are critical risks for investors to keep a keen eye on and if judged necessary to make the requisite adjustments to portfolios.

For investors the implications are many but perhaps the key message revolves around that key foundation of investing: diversification.

In multi-asset portfolios diversification is important to guard against inflation (e.g. through diversifying the defensive component of any portfolio to include inflation-linked bond, commodity baskets, gold etc.) and to guard against potential shifts in long held assumptions regarding asset return correlation.

In addressing the latter, well-managed, ‘true-to-label’, ‘non-directional’ long/short equity and bond (absolute return) portfolios may have a role as well as non-directional hedge funds. Diversification in portfolios sectorally and geographically is also important.

‘Good’ active management also becomes more important as variability of return across stocks, sectors and geographies potentially becomes more pronounced.

By Stephen Miller, Investment Strategist

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