Why ASX tech shares are so much more attractive than US stocks

Happy man and woman looking at the share price on a tablet.Happy man and woman looking at the share price on a tablet.

There can’t be much argument that ASX technology shares are the ones to suffer the most from the market downturn over the past 18 months.

From its November 2021 peak to the start of this year, the S&P/ASX All Technology Index (ASX: XTX) painfully lost roughly 40%. Over in the US the Nasdaq Composite Index (NASDAQ: .IXIC) didn’t fare much better, falling about 35%.

However, 2023 has brought some light to the tunnel.

The ASX tech index is up 15% so far this year while the NASDAQ is 17% higher.

So does this mean it’s time to stop being shy about buying tech shares?

Betashares portfolio analytics associate Alex Parker this week had some thoughts:

What hurdles does tech face in launching a revival?

The first point to note when deciding whether to return to tech stocks is the recent events in the US.

“The recent weakness in the US banking sector is a cause for consternation,” Parker said on the Betashares blog.

“However, the larger companies in the tech sector appear unlikely to fall victim to the contagion. These companies typically have high cash balances and low leverage, which will make them resilient to any coming financial downturn.”

Ironically, any signs of a downturn could compel the central banks to cut interest rates earlier than what we currently expect, which the tech sector would absolutely love.

Considering this uncertainty, Parker suggests that anyone wanting to wade back into tech might prefer to go for ASX shares rather than US ones.

“The Australian technology sector offers unique characteristics that could potentially benefit investors,” he said.

“The first thing that stands out when looking at Aussie tech – compared to the large global technology sectors in the US and China – is the prevalence of business-to-business (B2B) revenue models.”

Parker took WiseTech Global Ltd (ASX: WTC), Xero Limited (ASX: XRO) and Altium Limited (ASX: ALU) as prime examples of the global success of B2B tech out of Australia and New Zealand.

The great advantage of B2B tech companies is that they have much more certainty over earnings than their consumer-facing counterparts.

“The revenue streams of these businesses tend to be stickier than those of consumer discretionary focused firms like some US tech giants, with long term contracts and the difficulty of businesses switching essential software likely to provide support in the event of an economic downturn.”

Australia vs the world

Parker also noted that the companies that make up the ASX All Tech index source the majority of their sales from overseas.

With economic clouds looming, this is another ace up the sleeve for Aussie tech stocks.

“In economic downturns, history suggests investors typically sell off Aussie dollars in favour of traditional safe haven currencies such as US dollars,” said Parker.

“As a result, the services that Aussie tech firms provide become more attractive to foreign customers in terms of their own currencies – or sales denominated in foreign currencies become worth more in AUD terms.”

Even in the longer run, the Australian tech scene seems to have more potential for growth than overseas.

“Aussie tech’s growth runway appears attractive for long term investors,” Parker said.

“The sector is less mature than the US tech industry — or for that matter the Australian banking and resources sectors that dominate the S&P/ASX 200 Index (ASX: XJO). And while not as headline grabbing as some of the global tech giants, Australian home grown technology players such as WiseTech and Xero have already become globally recognised players in their respective fields.”

The post Why ASX tech shares are so much more attractive than US stocks appeared first on The Motley Fool Australia.

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Motley Fool contributor Tony Yoo has positions in Xero. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Altium, WiseTech Global, and Xero. The Motley Fool Australia has positions in and has recommended WiseTech Global and Xero. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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