Is the ASX tech sector in for more pain?

ASX tech shares have had a rough month or two. But there's the potential that things could get a lot worse for the tech sector going forward. Here's why.

Sebastian Bowen

Author Bio Sebastian Bowen has been a Motley Fool contributor since late 2018. Sebastian found his passion for writing and educating others about shares and all things finance after completing his studies in political, economic and social science and enjoys bringing this passion to life at the Fool. His investment philosophy is a simple one – buying high-quality companies at prices that make sense. When he’s not researching his next investment at all hours of the morning, Sebastian enjoys classic movies and likes to unwind with a good book, newspaper or record. Areas of Expertise Dividend investing ETFs Education Bachelor of Political, Economic, and Social Sciences (Government and International Relations), University of Sydney Social Media X/Twitter Favorite Investment Quote "In the short run, the market is a voting machine, but in the long run, it is a weighing machine." – Benjamin Graham

Published March 31, 2021 5:11 pm AEDT

It's no secret that the place to be for S&P/ASX 200 Index (ASX: XJO) gains in 2021 so far has not been the ASX tech sector. Or any ASX shares that can be called a 'growth share' for that matter.

Former high flyers like Afterpay Ltd (ASX: APT) and Zip Co Ltd (ASX: Z1P) have spent the last month or so coming back to earth after recovering spectacularly from the lows of the coronavirus-induced market crash last year. Since 16 February, Zip shares have lost more than 46% of their value, whilst Afterpay is down more than 34% over the same period.

It's not just these buy now, pay later (BNPL) companies that are suffering though. Xero Limited (ASX: XRO) is down almost 15% in 2021 so far. Altium Limited (ASX: ALU) is down nearly 23%. Appen Ltd (ASX: APX) has lost a hefty ~37%.

In fact, the entire S&P/ASX All Technology Index (ASX: XTX) is down 9% in 2021 so far.

The catalyst for these reversals of fortune has almost universally been blamed on rising government bond yields. Bond yields punish growth companies especially hard because they dampen the appeal of companies that are valued on their potential future earnings, rather than on the earnings they make today. That's pretty much every high-flying growth share. Remember, even at today's share price, Afterpay is worth more than Coles Group Ltd (ASX: COL), even though Coles is laughably more profitable than Afterpay at the present time.

But the pain might be about to get worse for ASX tech investors.

Bond blitz coming for ASX tech shares?

According to CNBC, the US 10-year government bond yield hit a high of more than 1.77% in overnight trading. That's the highest level US 10-year Treasuries have been at since January 2020, a good 14 months ago. Even though I'm sure I don't have to remind you, that's also since before the pandemic.

Our own 10-year government bond yields have also been rising, as is typical of US and Australian bonds. At the time of writing, the 10-year Australian government bond yield is sitting at 1.78%.

Say yields continue to stay at this level, or continue to push higher? We could well see an acceleration of selling across growth shares and in the tech sector in particular.

If these companies have a large presence in your ASX share portfolio, this could be an area you want to keep an eye on going forward.

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