The ASX share market has been abuzz this week with the economic story of the United States. Specifically fears of inflation, which have reared their head this week in dramatic form.
On Wednesday (our time), we learned that US inflation numbers have come in at their highest level in more than a decade.
This naturally led to something of a market panic. Government bond yields spiked, for one. And although the US market indexes like the Dow Jones Industrial Average (INDEXDJX: .DJI) continue to trend pretty close to their all-time highs, interest-rate sensitive stocks in the US have cratered. And ‘interest rate sensitive’ shares tend to be those in the tech space.
This is evidenced by the Nasdaq Composite (INDEXNASDAQ: .IXIC) Index. While the Dow Jones remains above 34,000 points today, just 2% from its all-time high, the tech-heavy Nasdaq has taken a beating, down more than 7% from its own high that it reached last month, and down 5% over the past week alone.
ASX tech shares sold off on US interest rate concerns
Many US tech shares have been hit harder than that. Tesla Inc (NASDAQ: TSLA) is down 14% over the past week. MercadoLibre Inc (NASDAQ: MELI) is down around 11%. And Nio Inc – ADR (NYSE: NIO) has lost 16%.
Here in Australia, this panic seems to have spilled over into our own ASX tech shares. That’s despite the Australian economy not facing the same kind of inflationary pressure. We have seen some of the ASX’s most prominent tech shares smashed this week, including Afterpay Ltd (ASX: APT) and Xero Limited (ASX: XRO).
Why these shares? Well, because they operate with a lot of debt on their balance sheets, and are in ‘growth mode‘. This makes these companies very sensitive to interest rates.
Many of these companies and their like are also priced against their future cash flows, not what they are producing right now. That means that higher interest rates today make their future cash flows riskier. That’s how some financial models work anyway.
But perhaps this is a giant buying opportunity.
A flash in the pan?
Let’s look at the facts. Yes, the US inflation numbers that we saw this week were dramatic. But the US Federal Reserve doesn’t seem too bothered. According to a report in the Australian Financial Review (AFR) yesterday, Fed vice chair Richard Clarida went on CNBC yesterday and attempted to calm the waters. Here’s some of what he said:
Our baseline view is that inflation is going to be close to our long-run objective of 2 per cent, but we will be vigilant… I think what the data is telling us now is there is going to be some upward movement as we reopen, but that it won’t persist over a long period of time, and that’s my view as well.
Remember, the US Fed has previously all but committed to leaving interest rate at near-zero until at least 2022 and probably 2023. Even if inflation picks up. If the Fed does indeed follow this course of action, there is very little to fear in the tech sector.
It’s higher interest rates, not just inflation itself, that tends to take the steam out of growth stocks, as we discussed before.
And if this latest round of US inflation is indeed just a ‘blip’ (the view Mr Clarida seems to think) rather than the start of a sustained rise, then there’s nothing to worry about anyway for the tech sector.
If this turns out to be the case, then the market is arguably overreacting, and panic-selling tech shares. This does indeed point to a possible buying opportunity. There are a lot of moving parts to this situation, though, so keep vigilant and try and see the forest through the trees.