In 2020, as more and more people were forced to work remotely, or from home, technology stocks rallied massively following the crashes that shook the markets in March of that same year. As a result, the Nasdaq Composite posted some very impressive gains at the end of the year.
Since then, tech stocks have enjoyed somewhat of a bumpy ride, and have seen some highs, and plenty of lows, particularly in 2022, which was one of the most volatile years for investors in over a decade.
Driven by the advancements in AI, and indeed, buoyed by the fact that inflation is dropping and interest rate cuts will surely now be on the horizon, markets have started 2024 a great deal calmer and more positively than in recent years.
As we enter Q2 however, concerns are being raised over new regulations being imposed upon the technology sector, particularly in the UK and EU. But what are these new regulations, what do they mean for tech stocks, and more importantly, what consequences will they have on investors?
A Brief Overview of Tech Stocks in 2024
In 2022, the stock markets took a real hammering. Bearing the brunt of many of these blows, however, was the tech-heavy Nasdaq Composite, and tech stocks in general.
2023 was noticeably better, with the Nasdaq seeing a 9% increase over the previous year. That trend hopefully looks set to continue for 2024.
At a glance, tech stocks have thus far started the year strong, though there is a lot of variance in performance, even amongst the so-called ‘Magnificent 7’ (Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla).
There are concerns however, tech stocks may be overvalued, particularly when it comes to AI. Despite this, tech stocks have performed well, with plenty of companies outside of the Magnificent 7 offering a lot of scope for growth.
One potential fly in the ointment, however, is the implementation of new regulations in the EU and UK with regards to digital platforms, AI, cyber security, privacy agreements, data, and more besides.
New Tech Regulations and Potential Consequences for Tech Investors
Needless to say, as several new regulations are rolled out across tech sectors in the UK and EU later this month, investors are concerned that tech-heavy portfolios may suddenly become more vulnerable and volatile.
But what are some of these key regulations, what are they for, and what could this mean for investors?
(UK) PSTI Act
The PSTI (Product Security and Telecommunications Infrastructure) Act will come into force at the end of April 2024.
This act basically applies to importers, distributors, and manufacturers of any consumer products that have internet connectivity capabilities, though there are a few exceptions. Considering the fact that you can now literally purchase bottles of water that can connect to the internet, you can see why this could be an issue.
The main reason why investors are concerned about this particular act is down to the fact that it will require importers, distributors, and manufacturers to first seek assurances in every link in the supply chain that they are in fact compliant with this act. The more links there are, the more of a potential headache this can cause. All it takes is for one link to fail to comply and you could potentially see a chain reaction rippling its way through the rest of the supply chain, which could cause a great deal of disruption.
Each device will need to present a Statement of Compliance to indicate that said device is following the rules. This in itself is causing issues as some are using a digital statement, whereas others are utilizing a QR code. The concern for investors is that, because so many tech stocks are so reliant upon the internet, if companies fail to comply, they could face all manner of legal and financial repercussions, which would of course see company valuations take a real dive.
(EU) Cybersecurity Act
In the European Union last year, the EU Commission proposed an amendment to the Cybersecurity Act currently in place. This was essentially to also include the adoption of certification schemes for managed security services.
In March, negotiators for the Council Presidency and European Parliament reached an agreement to amend the act currently in place. The act, which currently covers ICT products, services, and processes, will also now cover managed security services as well.
While this act will of course improve cyber security, the concern for investors is that implementing new security measures will not be cheap, and will therefore eat into a company’s profits.
(EU) Digital Markets Act
Sticking with the EU, the upcoming Digital Markets Act (DMA) will soon come into force. This particular act imposes what it is calling ‘pro-competitive’ obligations on particular services offered by 7 companies (Alphabet, Apple, Amazon, ByteDance, Meta, Microsoft, Booking.com).
These designated gatekeepers, as they are often called, must implement measures that ensure that they are compliant with these obligations. Failure to do so will result in financial penalties, and potential legal action.
Apple, which is so far the first company to have infringed upon these obligations, could potentially face fines of up to 10% of global annual turnover. Again, if you’re a tech investor and companies in your portfolio are found to have infringed upon these obligations, this will give you a real headache as their valuations will almost certainly drop sharply.
(EU) Artificial Intelligence Act
Finally, the AI Act proposes a thorough framework for the regulation of AI software and tech in general. Put simply, it will set out a risk-based approach where AI systems will either be fully prohibited upon the basis of unacceptable risks, be permitted but subject to information and transparency obligations, permitted subject to compliance with stringent requirements, or simply permitted without restrictions.
There has been a lot of talk about regulating AI, and, if approved these regulations could prove most disruptive of all, particularly with regard to companies placing such a strong emphasis on their AI tools and software.
AI stocks have helped tech stocks to rally, but there are now concerns that they may be overvalued. If this is the case, if the AI Act is passed, it would mean AI stocks will become more volatile, which could put off low-risk investors and have them looking for safer bets to add to their portfolios instead.