Will the Technology sector continue to move downward?

By Julie Vargas

The technology sector has played a vital role over the past two years. In 2020, ASX 200 Information indicates the Technology sector was amongst the leading sectors on ASX. However, since 2021, the index continued to move downtrend. In the last one year, the index delivered a negative return of 24.03%.

As per one of the reports by Deloitte, in 2021, many supply chain networks struggled. A similar challenge continued in 2022. It remained a challenge for many technology companies. The supply chain continues to be challenging because of the existing geopolitical tension.

In this situation, how players from the technology space address these challenges will play a vital role in deciding the index’s performance in the coming period. These challenges can be opportunities for many leaders from the tech space to tackle these situations deliberately and purposefully. There is an opportunity where these tech players can lay a solid base for the upcoming innovation and growth. Some key areas which could play a foundational role in 2022 include:

·????????Cloud Computing

·????????Creating supply-chain for future

·????????Build the next iteration of hybrid workforce

·????????Take initiatives to create sustainable workforce.

Factors which influence the Australian Technology sector:

Within the past two years, some of the most common factors that influenced the performance of the technology sector were the performance of the key players within the index, NASDAQ performance, the inflation rate, foreign exchange, and disruptive technologies. In this section, we will see how these factors influenced the performance of the market.

The performance of the key players within the index:

There are two indices from the tech space S&P/ASX 200 Information Technology and S&P/ASX All Technology Index on ASX. The S&P/ASX All Technology Index (XTX) provides an unrivalled overview of a single index featuring Australia’s top and emerging technology companies across various sectors. This index sets a new standard for benchmarking technology companies.

This index was designed to provide investors with the fastest-growing technology players. As of 31 December 2021, there are 77 constituents. Amongst these 77 constituents, the performance of the top 10 players has a major impact on the overall inde

Data after market close on 04 May 2022

Performance of the US Technology Sector

It is generally seen that the performance of the Australian technology sector is influenced by NASDAQ performance. NASDAQ Composite includes almost all stocks that are listed on NASDAQ Stock Exchange. It is amongst the most followed stock market indices in the US.

Like major stock indexes, NASDAQ Composite is weighted by the market cap of underlying components. It means that even a small change in the bigger player in the index will impact the performance of smaller players.

Many Australian stocks are listed on NASDAQ. Some of them include Advanced Human Imaging, Alterity Therapeutics Limited, Genetic Technologies, Immuron, Immutep Limited, Kazia Therapeutics, Mesoblast, and Opthea Limited. Hence, any major movement in the NASDAQ directly impacts the Australian tech sector.

There is also a list of Australian ADRs:

·????????Afterpay?????????????

·????????Brainchip Holdings??????????????????????????

·????????Melbourne IT???

·????????Splitit Payments Limited??????????????

·????????Wisetech Global??????????????

·????????Appen Ltd.

·????????Electro Optic Systems Holdings????????????????

Inflation rate:

During the pandemic, big tech players showed significant growth in their share prices. Many tech players posted massive growth and are looking overpriced. Because of the recent increase in the Fed rate, many tech giants like Amazon have noted a significant drop in its share price. The Company posted an unsatisfactory revenue forecast. The weak update comes as Wall Street fears a possible slowdown in consumer expenses with rising inflation.

In general, tech stocks are vulnerable to swings in interest rates as they have a high PE ratio, and they typically pay less in the form of interest rates. The interest rate has an inverse relationship with the PE ratio. Mathematically, when inflation is high, PE tends to move down as the earnings in the denominator move up compared to the stock price.?????????????????????????????

Forex:

Australia exports mining equipment, technology, and services to countries like Thailand, the USA, Vietnam, Canada, New Zealand, Philippines, Ghana, India, China, Poland, and Indonesia.

The fluctuation in currency rate exchange can impact trade, economic growth, capital flows, interest rate, and inflation.

For example, if the AUD/USD exchange rate is 0.75, it means that US$0.75 can be exchanged for payment of AU$1. When the value of the Australian dollar increases relative to another currency, we say that the value of the Australian Dollar appreciates.

When a currency appreciates, exports are expensive, and imports become cheap. Thus, the exchange rate plays a significant role as the exchange rate between the countries would decide the amount of cash flow into the system. It influences the revenue and the profit of the business and impacts the stock’s performance.

Disruptive technology:

Disruptive technology can potentially impact growth, employment, and inequality by creating new markets and business practices, the need for new product infrastructure, and different labour skills. Other than this, disruptive technology can affect existing firms in the established market, the labour market, the income of workers, and the distribution of income.

Investor Sentiment:

Investor sentiment has a key role in influencing the market as it helps determine the best stock to trade. To understand the market sentiment, investors use multiple indicators like volatility index, moving averages, high-low index, and bullish percent index.

Bottom line:

Multiple reasons have led technology sectors to bleed lately. One of the key reasons which impacted the Australian technology sector and the technology sector of other countries is the weak market sentiment. Investors fear that the fast-growing companies are running out of the steam. Another reason impacting the technology sector worldwide is the rising inflation.

Because of the rise in inflation, the expense of the companies goes up and reduces their pricing power. Another demerit of rising inflation is that it can impact the future earnings estimates of the companies, which in turn affects their share price.

Because of these factors, many investors are gradually moving away from technology stocks and following the market trend.

In the existing environment, it would not be easy to figure out the exact time by when we can see improvement in the technology stocks. However, we can say one thing: the sector should bounce back strongly once these companies develop strategies to withstand inflationary pressure and introduce some changes in the existing technology or disruptive technologies to lessen the current challenges.

* Julie Vargas is a Financial Analyst at Kapitales Research, Australia.