"Is the party over for the rally in technology shares?" a friend asked me at a barbecue over the weekend.
Like most of my mates, he knows what I do for a living. And like most of my mates he brushes over my objections that my crystal ball is no more functional than his own.
Since his question didn't relate to personal financial advice, for which I'm not licensed, but general advice, for which I am, I decided to take the bait.
"Not by a long shot," I said, before hastily adding, "In my opinion."
Yes, the S&P/ASX All Technology Index (ASX: XTX) – which tracks 50 of Australia's leading and emerging technology shares – is down 11% from its August 25 record highs.
It's a similar pattern with US technology shares, where the tech-heavy NASDAQ-100 (INDEXNASDAQ: NDX) is also down 11% from its peak. Though the Nasdaq didn't hit its all-time highs until September 2. (Yes, it's really been less than 2 weeks since share prices on the Nasdaq began to lose ground.)
But you have to bear in mind that both of these indexes are packed with tech shares that saw their share prices absolutely explode over the previous 6 months.
Keep these explosive share price gains in mind
On the Australian All Tech index, that includes shares like Nextdc Ltd (ASX: NXT) where the share price is up 66% since March 16, and WiseTech Global Ltd (ASX: WTC) share price, up 163% since March 19.
On the US Nasdaq we have, of course, the industry behemoth, Apple Inc. (NASDAQ: AAPL). Apple's share price has gained 100% since March 23.
With those kinds of gains on the recent scoreboard, it's little surprise that the Nasdaq 100 is still up 58% since March 23. And the Aussie All Tech index, while slipping again today, is still up 92% from that same date.
It's also little surprise then that a retracement was due. Some profit taking and short-term consolidation.
"But," I told my mate as he helpfully topped up my wine, "all of the tailwinds that have sent tech shares rocketing higher since March are still in place."
Effective vaccine or no, the trend of working, shopping and socialising from home has taken off. Society simply won't go back to functioning in the same way we were in January. That will continue to drive more revenue to the well-placed technology players as the demand for their products and services accelerates.
Tech shares should also continue to benefit from the same tailwinds that have driven the broader All Ordinaries Index (ASX: XAO) to a 33% gain since 23 March. Specifically, unprecedented levels of government stimulus from developed nations the world over. And equally unprecedented low interest rates, with the Reserve Bank of New Zealand the latest to be considering negative rates in 2021.
"Okay," my mate conceded. "But what if Australia's relations with China keep going downhill?"
But what about China?
Ah. Now we were getting somewhere.
While trade remains robust with our largest trading partner, the financial headlines have been trumpeting China's plummeting investment levels in Australia.
This headline, as one example, comes from this morning's The Guardian, 'Chinese investment in Australia plummets 47% in a year as diplomatic tensions rise'.
This is the third year running that Chinese investment into Australia has dropped. And, according to the article, China is pulling out of Oz faster than its other interests:
ANU's Prof Peter Drysdale, who leads the Chinese investment in Australia (Chiia) database, a unique resource collating how much and where money is being spent, said Australia was experiencing much sharper falls in investment than the global trend.
Globally, Chinese investors spent 9.8% less, compared with 47% less in Australia over the same period.
Now, on the surface, you'd think that missing out on billions of dollars in Chinese investment money would put further pressure on ASX share prices.
But, according to Catapult Group International Ltd's (ASX: CAT) executive chairman Adir Shiffman, the opposite is true. At least when it comes to technology shares.
As the Australian Financial Review reports, Shiffman says technology shares will actually benefit from Australia's geopolitical tensions with China. That's because China's economic sabre rattling has exposed just how reliant Australia is on China, particularly its large appetite for our raw materials.
Shiffman says:
The combination of COVID-19 bringing technology into sharper focus, combined with increased awareness of the perilous nature of our export mix is good timing for tech. Tech exports generate more money per unit of energy put into making them and the customer base is more diverse and includes customers that are strategically aligned like the US and Europe.
Of course, I didn't have this quote at hand to deliver to my mate over the weekend barbecue. Nor could I tell him that Catapult's share price was up 257% from its 25 March low.
But I did get him to reconsider sounding the death knell for ASX tech shares.
Indeed, in my opinion, the best is still ahead in this rapid growth sector.
