29 May 2023

    Expect more job loss pain this cycle ‑ especially in tech land

    Matt Peek

    Portfolio Manager

    Email Matt
    Matt Peek

    Portfolio Manager

    Email Matt

    Like supporting your favourite sports team as it goes through ups and downs, the economy is an inherently cyclical beast. For years the All Blacks had a long golden era and it seemed it would always be that way. Now it’s World Cup year and the shine is well and truly off their traditional favourites status.

    There are similarities to the global economy, which has been strong for over a decade, even shrugging off an unprecedented pandemic. But that was before the dormant force of inflation awoke from a 40-year slumber and forced central banks to raise interest rates to what are uncomfortable levels, dragging economic growth downward.

    Markets tend to be cyclical. Long cycles often lull us into thinking things have changed forever. A strong economy will see growth and hiring as companies seek to make hay while the sun shines.

    That’s where we’ve been. After that peaks, there is the usual belt-tightening and austerity before recovery and the cycle begins again.

    US tech sector a cautionary tale for late-cycle excesses

    The tech sector has epitomised this cycle, with high-flying software developers at the likes of Google and Meta commanding premium salaries as the companies strived for more growth.

    Facebook, Instagram, and WhatsApp owner Meta became the poster child for late-cycle tech excesses, investing heavily in a new area of the business that wasn’t its bread and butter - what it called “Reality Labs” or the “Metaverse”. It even changed its name to signal CEO and founder Mark Zuckerberg’s penchant for this new alternative reality.

    Companies pandered to every whim to attract and retain talent. The internet was awash with videos showing work lifestyles of free candy, games, catered lunches and coconut waters. With these skills in hot demand, skilled developers were able to hop between jobs and play their employers off for pay rises.

    But in November 2022 it all changed. The big tech companies were now making headlines with large-scale layoffs to focus on profitability. What began at Meta and Twitter quickly spread across the industry to Amazon, Google, and Microsoft as the trend ramped up into 2023.

    After a great evening, the lights had just been switched on at the party.

    The numbers are massive. On the way up, Meta hired over 19,000 people in one year to grow its workforce by over a quarter. After its financial results soured, the company was forced to reverse course, making three rounds of cuts since November 2022 - totalling around 25,000 people.

    Overall, the US tech sector has laid off a staggering 340,000 people in the last six months.

    NZ’s tech sector has only just begun to follow suit

    Our tech sector hasn’t been immune from these same errors, we’ve just been slower to act. However, this is now starting to change.

    Just like its big-tech counterparts, local tech company Xero added around 1,500 people over just 18 months, far higher than the previous average. Then in March, new CEO Sukhinder Singh Cassidy outlined plans to reduce its workforce of around 5,000 people by 700 to 800, or around 15 per cent, shrinking teams, reducing middle management, and removing duplication to “streamline and simplify” the company to seek a “better balance of growth and profitability”.

    Xero isn’t alone, other high-profile tech companies here have been making plans to reduce their workforces too, such as the investment app firm Sharesies, and shipping and logistics platform Trade Window.

    If the experience in the United States is anything to go by, there’s likely to be more to come with an ongoing effort needed to get back to a more sustainable position.

    Software industry cycles down from frenzied growth

    Across the board globally, but particularly in software, the dial had been turned too far in favour of growth at any cost.

    Fuelled by cyclical highs in demand and cheap credit, too much money was poured into companies, particularly early-stage ones, at generous valuations. Now this is starting to get wound back, and the focus is shifting back toward sustainable growth and cashflow generation.

    As the slowdown hits, we’re also seeing a shift in power back toward the employer. Companies both big and small who’ve had long lists of tech vacancies may now find it easier to recruit. Some talented developer-entrepreneurs may even start the next Google or Xero.

    Some austerity is necessary for inflationary forces to subside, but economic cycles correct themselves and begin again. Consumer demand will fall, wage pressure will abate, and interest rates will peak.

    As for the All Blacks, let’s just cross our fingers and hope we are back on the up cycle come World Cup time.

    This article was originally published in the NZ Herald on 10 May 2023.

    Talk to us

    If you would like to talk to someone about your investment strategy, the team at Fisher Funds are here to help. Please contact us or get in touch with your adviser.