Kovanda: The Big Tech stock debacle scattered the ESG phenomenon

Shares of tech giants have been huge losers this year. A loser that lasts. Next year also looks like a really hot one. The key reason will be the continuation of the US central bank’s hawkish monetary policy. In short, the Fed does not intend to loosen its monetary policy screws just like that. Indeed, he still did not tame inflation as much as he would have imagined.

Since the beginning of this year, US stocks as a whole have lost roughly sixteen percent – that’s how weak the performance of the Standard & Poor’s 500 index is, including dividend reinvestments. However, if we do not take into account the five technology stocks that were among the winners of the bull market until last year – Meta, Apple, Amazon, Netflix and Alphabet – other key US stocks suddenly fall by only twelve percent. In the five hundred largest US publicly traded companies, the failure of only one hundredth of them – those previously known under the acronym FAANG – is enough to collapse the overall indicator by another third. That’s how big the loser is, that’s how big and important the five companies are.

During a significant part of the pandemic times, the technological giants grew like water. At the end of last year, they achieved their historically record market valuation. But then the Fed came in full force. So far, it has been raising its interest rates at the fastest rate in decades. He was forced to do so by inflation reaching forty-year highs.

FAANG shares or MAANA – i.e. Facebook (now Meta), Apple, Amazon, Netflix and Google (now Alphabet) – are losing an average of around 42 percent this year. Meta, formerly Facebook, is hemorrhaging the most, which is down 66 percent. Meta has already written off almost 80 percent of its historically record market value last year. It is no longer even among the twenty largest companies in the Standard & Poor’s 500 index. The debacle. It is not only the shareholders, but also the company’s employees who take it away – thirteen percent of them will lose their jobs. These are more than 11 thousand people.

I messed up, wrote Zuckerberg, and fired thousands of people

News from companies

Another American billionaire, Mark Zuckerberg, is following in the footsteps of Elon Musk’s Twitter. A giant layoff is coming at Meta Platforms. 11,000 people, representing about 13 percent of its workforce, must leave Facebook’s parent company.

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Predation and innovation go hand in hand

Of course, it’s not just the giants that are collapsing, the entire tech sector is collapsing. After all, its aggregate global indicator – MSCI World Information Technology – is losing roughly 26 percent this year. Although even in this indicator, mainly American technology titles are represented, which make up almost 89 percent of the index.

Since March this year, the Fed has increased its key interest rate by 3.75 percentage points. Another increase can be expected this December and then next year. At the same time, technology stocks are particularly sensitive to the associated increase in funding. A rise in interest rates by any central bank can be seen as a signal that for some time it is in the interest of society as a whole favor conservation over innovation and moderation and stability over growth. In times of relatively high interest rates, aggressiveness and innovation fall by the wayside, and investors resort to so-called defensive titles, such as shares of companies in the healthcare and pharmaceutical sectors, or perhaps network and energy sectors.

Technology stocks are often classified as growth stocks. That’s because their current price is based on expectations of rapid growth and expansion in the coming years, and on regular profits expected only in the relatively distant future. But the higher central bank interest rates are – and will be – as well as market interest rates, the less attractive distant gains are.

Investment massacre of portfolios. It’s hard to make money this year


An honorable exception is the dollar, on whose growth investors could earn almost 20 percent. Commodities also performed erratically. Otherwise, traditional investment vehicles are failing this year, and the first nine months of the year represented the fourth-worst start to the year in a century, wealth managers said at the Investment Outlook conference.

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It is not for nothing that the interest rate is sometimes called the discount rate. It “discounts” the future. It cheapens her. Discounts future profits. If the interest rates are high now and if they are to be high in the coming quarters, even years, in short, it can be much more profitable to have it now rather than waiting for a future profit. And live off the interest on those profits. Profit now and here, however, is ensured by equity securities, not growth, but value. These are established, traditional shares, often the so-called defensive ones. In addition, these companies often pay dividends from their regular profits. Those who own CEZ shares bet on value stocks, those who prefer Tesla shares, then on growth stocks.

But this year’s fall in FAANG shares is not only due to the tightening of monetary policy screws. Each of the technological giants faces other, already more or less specific problems. Sometimes even one of the giants “fires” the other. An example is the relationship between Meta and Apple.

The advertising business is changing

Last year, Apple fundamentally changed its approach to protecting user privacy within its own iOS system. They can now choose whether to allow advertisers to track their behavior and collect data about it. Advertising targeting on Facebook or Instagram, Meta’s “flagship” social networks, is thus less accurate. Advertising therefore loses its former effectiveness and, under the current conditions, also its usefulness for advertisers. To make matters worse, Apple is now denying advertisers access to data that allows them to evaluate the effectiveness of a given digital ad. Thus, advertisers cannot as easily as before concentrate their advertising expenditure exactly where it is most effective. Earlier this year, Meta estimated that these changes would deprive it of approximately ten billion dollars in advertising revenue, which is roughly a tenth of the originally projected total revenue.

Read more comments by economist Lukáš Kovanda here

In October this year, Apple even toughened things up. So if, for example, an Instagram influencer in the mobile iPhone application pays the social network to specifically promote his post, and thus have a greater impact, Apple will now take roughly a third of the paid amount, a kind of “notice”. Before that, the entire amount ended up in Meta’s pocket. No wonder that Meta started to criticize Apple with a lot of criticism. However, other social networks are also affected, for example the key rival of the social networks Met, the Chinese TikTok. Apple stifles that it is concerned with the protection of user privacy, or that it is just following its own broader principles of business policy. In fact, his moves are apparently motivated at least in part by building his own advertising business.

In short, the difficult era of rising interest rates forces companies to seek profit wherever possible. Apple, like another giant, Amazon, destroys high interest rates also because they make consumer credit more expensive and worsen consumer sentiment. They thus paralyze the search for, for example, new iPhones or general interest in shopping, including online shopping.

Amazon is preparing for the biggest layoffs in history

Owner of Facebook, Twitter – and now Amazon. The biggest layoff in history is coming

News from companies

The American online store Amazon intends to eliminate around 10 thousand jobs, which would represent the largest layoffs in the history of this company. Citing sources familiar with the situation, The New York Times (NYT) reported about it today. Amazon employs over 1.5 million people worldwide. It also operates in the Czech Republic, where it employs several thousand people.

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(Un)expected victims

The failure of FAANG shares is also, in a way, the failure of investments under the heading of ESG, i.e. sustainable, low-carbon investing, focusing on environmental (E), social (S) priorities and those taking into account the principles of correct and transparent managerial management (G). FAANG stocks dominate many of the world’s largest ESG funds. However, when the technological giants fall massively, they take these funds with them and the entire segment of ESG investing, which has been so strongly applauded in recent times. Low-carbon investing therefore ceases to be sexy to a large extent.

Such a development coincidentally complements the events related to the war in Ukraine and the energy crisis, which, for example, in Asia or some European countries leads to a renaissance of nuclear energy (which before the war the EU almost wrote off as a dirty source), and even to at least a temporary resumption at the mercy of even such a resource as coal.

It turns out that ESG fashion, although it claims to be sustainable by definition, is not actually sustainable. At least not yet. Once interest rates rise or global energy is no longer extremely favorable, sustainable and responsible ESG investing will find itself in serious trouble.

Nespresso is testing compostable paper capsules.

Has aluminum rung its bell? Nespresso is testing compostable paper capsules

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Nespresso to launch compostable paper-based coffee capsules. Customers of a subsidiary of the Swiss food giant Nestlé were discouraged by the fact that the existing metal capsules often end up in landfills, even though they are recyclable. The paper capsules took three years to develop and will be tested in Switzerland and France, Reuters reported.

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Read more about ESG investing here