Is the party over for tech and biotech ASX shares?

The sun is now setting on high-growth technology and biotechnology ASX shares.

That’s according to several experts, who acknowledge that stocks in those sectors have performed well in recent years.

“In a world of zero interest rates, you can pay almost any price for future growth because of the risk-free rate, as represented by government bond yields,” said Investors Mutual Limited director Anton Tagliaferro.

“It should therefore not be surprising that growth stocks have performed so strongly in the last few years.”

Abrdn portfolio manager Gerry Fowler told The Australian Financial Review that “this cycle is over” for growth stocks that produce “no profits and won’t have any for a very long time”.

“They are simply priced for their potential for growth.”

The change in scenario means shares typically found in the tech and biotech sectors can be a drag on portfolios from now.

“Now, more than ever, it’s important to make sure growth assets don’t destroy a client’s wealth,” Tagliaferro wrote on a blog post. 

“With interest rates almost certainly to be on the rise in 2022, the sustainability of the returns from growth and speculative stocks is likely to be severely tested.”

He admitted this would be a challenge for investors now after years of “over-reliance” on growth shares to build their wealth.

Cash flow is king now 

After years of near-zero interest rates, any increase in borrowing costs, however minor, will be felt more sensitively than ever before.

“Valuation multiples for many growth stocks are so high that a 100 basis points of interest rate rises today is far more material compared to any other time in current investors’ memories,” said Tagliaferro.

“Highly priced growth stocks, or speculative stocks, will likely see a material de-rating as interest rates and hence the discount rates rise.”

While Fowler recommended investors turn to corporate bonds for their 8% to 10% yield, Tagliaferro still believed there was value among ASX shares.

“What you want as an investor is current cash flow — not 2040 or 2050s cash flow discounted back.”

So investors needed to be super selective from here onwards.

“We continue to find opportunities to invest in good quality stocks that we believe have strong competitive advantage, generate good cash flow, are managed by very credible and competent management teams, and where the outlook for the next 3 to 5 years looks very favourable.” 

Fowler hasn’t entirely abandoned tech all together though. 

He said giants like Microsoft Corporation (NASDAQ: MSFT) and Amazon.com Inc (NASDAQ: AMZN) are still worth holding because they’re already profitable, have pricing power and measurable growth.

“We are not [of] the opinion that broad markets need to fall significantly,” he said.

“Growth is still strong enough to support equity markets and their current valuations so long as we don’t get an even more aggressive [interest rate] hiking path.”

The post Is the party over for tech and biotech ASX shares? appeared first on The Motley Fool Australia.

More reading

• Will 2022 be the year of the cash or the crash for ASX shares?
• 2 ASX shares that could keep growing the dividend every year
• The ASX share that the whole world is relying on
• Rio Tinto (ASX:RIO) share price in focus today following record-breaking results
• 2 top ETFs for ASX investors to watch

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Motley Fool contributor Tony Yoo owns Amazon and Microsoft. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns and has recommended Amazon and Microsoft. The Motley Fool Australia has recommended Amazon. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

from The Motley Fool Australia https://ift.tt/L6uO7jT