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Highlights:
- Focus on Technology Dependence: Martin Conlon, head of Australian equities at Schroders, questions ASX-listed companies about their reliance on major technology providers and the risks associated with potential price hikes.
- Real Economy vs Financial Markets: Conlon highlights a growing disconnect between financial market valuations and the realities of the broader economy, particularly in sectors under pressure like healthcare and supermarkets.
- Balancing Cost and Productivity: Conlon discusses the dilemma of Australian companies either building proprietary technology or relying on global tech giants, emphasizing the importance of measurable productivity gains.
A Unique Perspective on Corporate Strategy
Martin Conlon, head of Australian equities at Schroders, stands out in his approach to evaluating ASX-listed companies. Known for engaging directly with prominent CEOs and chairpersons, Conlon’s inquiries delve deeper than mere financial performance or short-term stock movements.
His principal question centers around technological dependence: “Are you making your business reliant on big technology?” Conlon follows this up with a probing challenge: “And what are you going to do if they put prices up 15 percent a year?”
This question underscores a critical issue for many Australian companies across sectors such as banking, healthcare, telecommunications, retail, and resources. As organizations increasingly adopt cloud services and integrate advanced technologies like generative AI, their reliance on tech giants such as Google, Microsoft, and Salesforce grows, leaving them vulnerable to cost escalations.
Technological Dependence: A Double-Edged Sword
The adoption of external technology solutions introduces a significant business risk. While large-scale IT integrations offer immediate benefits like improved efficiency and scalability, they also tether companies to external providers with limited alternatives in case of price hikes.
For instance, the cloud migration trend consolidates reliance on global tech firms, further exacerbated by industry-wide consolidation. Conlon highlights the challenge for businesses to mitigate these risks effectively, particularly when technology costs can spiral upward unpredictably.
On the other hand, in-house solutions are not without pitfalls. Conlon refers to costly IT projects like Westpac’s Project Unite and Panorama, illustrating how mismanaged internal development can squander shareholder funds. For companies, the decision between building proprietary systems and purchasing from external vendors represents a strategic dilemma with no easy solutions.
The Disconnect Between Markets and Reality
Conlon's concerns extend beyond individual companies to the broader economic landscape. He frequently emphasizes the widening gap between financial markets and the real economy. As indices like the S&P/ASX 200 (ASX:XJO) reach historic highs, many Australians face increasing economic pressures, highlighting a disparity between asset valuations and living standards.
This disconnect raises questions about sustainability. Conlon argues that inflated stock valuations and concentrated wealth in financial markets fail to align with the realities of people working under significant economic stress.
This sentiment is evident in sectors like healthcare and retail, where profit pressures are often linked to high employment costs. Companies in these industries struggle to maintain profitability while providing substantial employment, underscoring the tension between shareholder returns and societal contributions.
Addressing the Productivity Puzzle
Conlon asserts that productivity gains must be the cornerstone of any strategic decision involving technology. Companies must justify investments by demonstrating how they will improve efficiency, often necessitating workforce reductions. However, such measures come with societal implications, particularly in sectors like healthcare, supermarkets, and transport that are significant employers.
This focus on productivity aligns with Conlon’s broader philosophy of prioritizing long-term value over short-term gains. He believes in evaluating companies based on their operational fundamentals rather than attempting to capitalize on transient market movements.
The Challenges of Value Investing
Value-conscious investors like Conlon face an uphill battle in today’s frothy markets. With the S&P/ASX 200 outperforming many active funds, maintaining discipline becomes increasingly challenging. Schroders' Australian Equity Fund has delivered consistent, though slightly underperforming, returns compared to its benchmark, reflecting the difficulty of adhering to a value-focused strategy in a market driven by momentum and growth stocks.
Looking Ahead: Tough Questions for the Future
Conlon’s inquiries into technological reliance and broader economic concerns offer valuable insights for Australian companies and investors alike. As big tech continues its relentless expansion, companies must address the risks of dependency while ensuring their investments translate into tangible productivity benefits.
This perspective also underscores the need for financial markets to remain connected to the realities of the broader economy. For investors, the challenge lies in identifying sustainable opportunities that align with both corporate fundamentals and societal needs.
