Has human behaviour become the capital of a modern economy? In this week’s Perspectives, Fund Manager David Jane, discusses how attention-grabbing stories through the social media world are now driving markets more than fundamentals, and why he believes this narrative is set to stay.
As technological change continues its relentless march forward, we have reached a point where information has become a highly valued commodity. As humans in large numbers, behave in highly predictable ways, information about their behaviours and techniques, and how to manipulate those behaviours has become the capital of a modern economy. This effects not just the real economy but is changing the way the stock market functions.
For this reason, the big digital economy stocks have been hugely successful investments, sitting as they do at the very centre of this transformation. They hold information on the vast majority of consumers. This they can leverage both in aggregate and also on specific consumers. This is the key to their advertising driven models.
As we enter the AI age this information becomes even more valuable, as does a broad swathe of other information that can be used to train the AI models. Hence, the revaluation of so many companies in the information gathering and marketing space and the efforts being made to enforce copyright and other protections. It is difficult to ignore the huge revaluations of those companies which are set to provide the infrastructure for this transition.
There are however, a number of less obvious impacts of this changed landscape. A major factor that drives these business models is attention. Way back in the early days some stocks were priced on a price per click or price per user basis. At the time this didn’t end well, but it has now become a reality. User attention is the driver of all these models, it creates the information that drives the value, creating a self-reinforcing feedback loop that is difficult to break. This is true for both the platform providers and the content creators. A great deal of investment must be made over time to get above a threshold where the model becomes self-reinforcing. While it is easy to point to the hugely successful creators on YouTube and elsewhere, and the huge revenues they generate for each of these, there are many thousands struggling to get to critical mass.
The time will come when some of the biggest content providers decide to float their businesses and no doubt these will attract valuations greatly above those of the legacy media providers. To get an idea of the scale of the content creator market, in February of this year, YouTube claimed it has paid over $70bn to creators over the past 3 years. This figure is not dissimilar to Disney’s revenues, and Disney owns Marvel and Pixar amongst others. Internet based attention is now much more valuable than old media attention because of its powerful data gathering potential.
There is a winner takes all aspect of this model which perhaps wasn’t obvious in the early days. Like in many industries, success creates the revenues that enable reinvestment in further success. The social media business environment is now far from the ‘democratic’ vision of the early days of the internet.
The attention economy is also having an impact directly into the way the stock markets function. As a greater proportion of the market is owned by passive investors, the pool of active money has shrunk. In fact, in terms of actively managed money it is possible to argue that retail is a much greater driver of share prices than actively managed institutional and mutual funds.
This makes the incentives to gain the attention of active investors and retail investors ever more valuable. It seems that a great way to gain attention of these investors has emerged in the social media world. Successful grabbing of attention has always been one key to success for a company listed on the public markets. Historically, charismatic CEO’s, exciting new products, the promise of untold riches have been key to attractive a high valuation for a company over time, now it is social media traffic.
Meme stocks immediately spring to mind but this is mainly a feature of US large cap growth stocks, think of the number of acronyms that have been created to describe the current attention on a narrow range of companies, currently known as the Mag7. This is an attention seeking strategy which lowers the cost of capital by increasing the valuation of a company. The purpose of Tesla’s numerous product announcements is not to sell more cars, BYD is vastly more successful than Tesla at that, but to gain attention for the shares, driving up the valuation.
The chart shows US valuations at various points in time, green being current and the historical highs and lows from 2020. Median valuations are relatively low, while a higher number of shares are at extreme high valuations. These highly valued shares are typically also amongst the biggest.
Distribution of individual underlying single stock PERs (US market)
Source: Longview Economic’s, Macrobond, Factset
Just like in the content creator world, success breeds success here. Gaining investor attention drives up the share price, increases liquidity and reduces the cost of capital. This drives further flow as these stocks are the bulk of passive investors’ portfolios. Those companies that have been successful at driving social media attention for their activities attract higher valuations than their wallflower peers for the same or less commercial success. This has led to a highly concentrated market with the dominant companies accounting for a disproportionate share of market capitalisation and the dispersion of valuations at an extreme.
It is this feature, the powerful need to drive attention, that has led to the concentration of the market into the largest US stocks and the total lack of interest elsewhere. At the same time this enables those same companies to acquire the neglected parts of the stock market relatively cheaply. This is how the large tech companies are able to cheaply acquire any potential competition cheaply. In the UK there are 19 ongoing takeovers for listed stocks on the FTSE 100 and FTSE 250 index, those with the lowest cost of capital are able to acquire the areas where attention is low. This seems to be the future of the financial markets, even more valuation dispersion and concentration.
We have always considered a three-pronged approach to stock selection, data (fundamentals), narrative and affirmation (momentum). The realisation of the importance of attention in the current market suggests an emphasis on a supportive and attention grabbing narrative should rank higher than the fundamentals.
Our role is not to judge but to understand and profit from these themes, we are pragmatic and seek to make money for our clients, whatever the market regime. Our momentum-based strategy should benefit from this approach. At the same time, the fact that we run a broadly equal weighted and highly diversified portfolio mitigates against a rapid change in the narrative about any particular stock.
Human nature is unlikely to change, so our social media attention driven stock market is set to stay. We would suggest that this will lead to continued concentration of the market in the stocks with the best stories. This regime may change again at some point but until it does traditional active investors must adapt or become irrelevant.
David Jane
Premier Miton Macro Thematic Multi Asset Team
