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Is the tech sell-off creating opportunities for investors?
A tech sell-off sparked by inflation concerns has seen world markets crash. But is it creating an opportunity for investors to ‘buy the dip’?
Is the tech sell-off creating opportunities for investors?
A tech sell-off sparked by inflation concerns has seen world markets crash. But is it creating an opportunity for investors to ‘buy the dip’?
The S&P/ASX 200 Index closed the week 66.6 points, or 0.9 per cent, lower at 7,014.2, despite rallying 31.5 points, or 0.5 per cent, on Friday, before growing slightly on Monday.
Australian tech stocks continue to face one of the worst runs they have had in years, as investors rotate towards value stocks battered by the COVID-19 pandemic.
As a result, over the last week, much of Australia’s WAAAX tech stocks suffered strong falls. Xero slid 15.9 per cent to $112.5, Afterpay fell 9.5 per cent to $86.35, WiseTech Global dropped 7.9 per cent to $26.00 and Appen declined 10.5 per cent to $11.00.
Meanwhile, Wall Street is suffering one of its worst sell-offs as inflation figures released in April show the US economy is heating up, with inflation data coming in at 4.2 per cent.
ETF Securities’ Kanish Chugh said inflation was inevitable, given the deflation from coronavirus introduced at the start of 2020.
“Rising inflation can scare investors, as it erodes the real value of financial assets,” he said.
“Adding to these fears is the fact that the Federal Reserve can raise interest rates if inflation rises, as part of its dual mandate. Rising interest rates can also worry investors, as they can impact companies’ ability to borrow money or refinance debt.”
Earlier this year, when tech stock started to dwindle, Dr Angel Zhong, RMIT’s senior lecturer in finance, told nestegg: “What goes up must come down.”
“I believe that tech stocks are overly expensive and this is likely to be a bubble that echoes the dotcom bubble in early 2000s,” Dr Zhong opined at the time.
But buying the dip has worked well
Despite the major market falls, Mr Chugh believes the sudden crash may represent an opportunity for investors, albeit coming at a risk.
“Betting against American technology companies the past 10 years has been a loser’s game. Buying the dip on the FANGs has worked extremely well,” Mr Chugh said.
“Year after year, the technology sector has printed the best profits and margins, defying sceptics all the way.”
He also opined that raising interest rates might not be the end of the tech sector despite investors fears.
“Rising interest rates do not ipso facto mean technology shares will fall either. Here, we should also note an interesting data point from investment bank Raymond James. Their researchers found that technology shares do best in a rising interest rate environment,” Mr Chugh concluded.
As for Dr Zhong, she warned: “There are several large tech firms in the market with an expensive valuation without making any profits.”
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