This is the third part of my video interview with James Anderson of Scottish Mortgage Trust (SMT). The global portfolio has 22% of its assets in China but Anderson sees no long-term threat to China from the US trade war. He also says a regulatory clampdown on the technology companies he invests in is unlikely to work, although he wishes global tax rules could be formed to ensure they are seen to pay their fair share.
Can’t watch now? Read the transcript
Gavin Lumsden: China has cropped up a couple of times already, Scottish Mortgage has got 22% exposure I think at the latest count, to the country. How much of a threat is the US China trade war to your world views, but also the rise of China or is it just part of an inevitable clash between two superpowers?
James Anderson: Well, it certainly worries me, the atmosphere in America is that superpowers have to clash and I’m not quite sure where they got this from. You know I would suggest to them that it’s a slight misreading of history and that one could be very happy in Holland or Italy today without thinking they’re a superpower any longer. I think what it’s doing though, in all seriousness it is increasing the speed of the autonomy of different blocks in the global economy. Now, I think that carries a lot of ironies because firstly in the long run whose block would you think is more likely to be dominant over the next 20 or 30 years? Personally, my money would be more on the rising wealth of that half of the world’s population in areas adjacent to China than the increasingly small number of people in America who have the wealth to be able to share in these great achievements, and I think I would want to focus on outcomes of that as well.
What are we at currently? About four times as many science and technology graduates in Greater China as there are in America. So I don’t really understand the current market psychosis, even if I can see it as a natural outcome of where we are in finance, that China is bound to lose, and I think what it’s actually delaying is what you would otherwise have been asking me about, the likely clash of the Chinese technology titans with their American brethren because you know, I think they’re going to be more and more sealed off in their areas and what we’re going to be talking about is which territory is drawing which side around them? Where does India go, where does Europe end up in these equations?
GL: Moving to consider the US then, just taking on that point. Some of our readers are concerned about the potential regulatory threat that some of the tech companies you invest in. Philip Bagshaw of City Asset Management, in reference to controversies over corporate tax avoidance, privacy issues, monopoly fears, Philip Bagshaw asks, ‘Are you concerned that some of the excessive behaviour seen in the tech sector will eventually lead to a public backlash, similar to what we’ve seen in the banking industry since the financial crisis?’
JA: In overall terms, I think this is an exaggerated worry from the point of view of the companies and I would turn it round and I would suggest to you Gavin that actually, in many cases this excessive worry is an opportunity to add to holdings in companies which are being dragged down by this. Why do I say that? Well, the cynical explanation in America would be I think that’s a naïve point of optimistic framing that the corporate sector in America is any longer under the control of the populace and the will of the populace. You know, America is well past the point at which corporations are controlled and that is in many ways a fear, but let’s be realistic about that.
GL: So, concerns about President Trump trying to act against Amazon or break up Google.
JA: Well yes quite. We can go in many directions with this. Well, if people wish to put their money on these bets that’s their choice. As somebody pointed out recently, if at the beginning of the year you had and it wouldn’t have taken, given Mr Trump some fairly obvious biases, that much intelligence to grasp this. If you had taken a position that what mattered was Mr Trump’s tweets, then you would have been long US steel and short Amazon. May I reflect to your viewers that that would not have been a very good investment policy! So, I think one’s naïve ...
GL: What a great investment indicator!
JA: The counter. Beneath the teasing of Mr Trump, I think there are very serious issues here and I actually meant that a lot about the dangers of the situation, from the point of view of good governance in the future. Now, I think that we are in a position where bad regulation, which is all that most of us will be capable of, is more likely to reinforce the dominance of the currently dominant companies, because they can cope with this. It’s newcomers as you well know in your own business, who if you would put a burden of regulation on top find it difficult to cope with. So historically and actually, ironically your comparison to banking industry is that why has there not been change? Because there is so much regulation that actually helps the big players. I worry a lot about that. But if we look at the next level? So, say for a moment that there was serious regulation of Amazon on the viewpoint, is that going to be good or bad for the stock price and for our savers? So first obvious manoeuvre, you say you’ve got to spin off AWS. Now, I think the stock market if that was announced …
GL: It’s a money-making opportunity.
JA: Fantastic! Secondly you say, absolutely in alliance with what happened with Microsoft or the telecoms companies, you regulate the core retail infrastructure, which Amazon thank God built, and no one else probably would have built. So you say they have to make a return on assets of, I don’t know, 12% let’s say. Well as you know Gavin and I suspect the questioner knows, they currently run that at effectively break even. So Amazon’s profits go up a lot. So I think this notion that regulation is this sort of fear out there that we need to contemplate is wrong, but may I before we move on because I think this is in essence gets us on to some very important topics, make two other contentions to you? The first one would be that actually this becomes a really, really serious issue because if what we’ve been talking about, about the progress of AI, the importance of data, whether it be in China or whether it be in America, is correct, then control of that data becomes ever more the critical factor and again, this is back to Harari. That is the single most important debate, but I don’t think these florid responses to Russian bots or whatever else are necessarily helping us to consider those issues and the very last one if I may, to go back to something one of your people said at the beginning or you were asking about. At the margin, we do try and have our say on these matters and I think where we feel most strongly is that it is very misguided in anything other than the short-term for these companies, to try and minimise their tax burden. What we would genuinely love to see would be a global tax that made it impossible to have havens or to have Ireland or whatever else you’re talking about on that score, and that an equitable contribution would both, in the long run, be good for the companies-.
GL: No escape for the tax dodgers and the public around the world would really appreciate that.
JA: I’d love to think we were powerful enough to get that done.