Has a turnaround already begun for ASX tech shares? Experts reveal the outlook for FY23

FY22 was a year to forget for ASX tech shares investors, with the S&P/ASX All Technology Index (ASX: XTX) falling about 35% compared to the S&P/ASX 200 Index (ASX: XJO), which fell about 10%.

The big question is, when does this trashing of ASX tech shares turn into a buying opportunity?

Have ASX tech shares bottomed yet?

If we take a look at the past four weeks, we see that ASX 200 shares have continued to fall by 1.1%. But the tech index is up 4%. What does that mean?

It may simply be a blip, or it could indicate a lift in confidence. Perhaps it’s even a sign that the bottom for ASX tech shares has been reached — and passed? Draw your own conclusions.

There are other positive indicators, too.

As my Fool colleague Zach reported last week, government bond yields are inversely related to the valuation of risk assets like ASX shares. As yields fall, valuations increase.

In addition, these yields are often interpreted as a reflection of financial investors’ attitudes towards risk.

Yields on long-dated bonds have wound back in recent weeks. This has led to a re-rating of tech shares in the near term, according to Zach.

The United States treasury note 10-year yield finished at 2.96% overnight, down from a high of 3.44% on 14 June. The Australian 10-year yield is 3.44%, also down from 4.09% in mid-June.

So, that’s all very interesting…

Overarching themes for ASX tech share investing in FY23

Investors brave enough to consider buying ASX tech shares in today’s volatile market could probably use some advice.

Alex Pollak is the founder and chief investment officer at Loftus Peak. The company is a specialist investor in global industry disruption and runs a listed managed fund on the ASX.

While Pollak’s commentary in a recent article published on the ASX website focuses on international tech stocks, his broader advice has relevance for ASX tech shares investors, too.

Go for quality in tech shares

Pollak says:

In today’s macroeconomic environment, company quality is key. Companies with strong balance sheets, good cashflows and current earnings are poised to best tolerate the high interest-rate environment. 

Quality in tech companies also distinguishes today’s market from that of 2000 during the dot-com bubble. 

Go for size in tech shares

Pollak also says that investing in large tech companies is likely to provide more safety in today’s macroeconomic environment.

That’s one of the reasons why he likes global companies, which are typically listed on overseas exchanges.

Pollak says:

As monetary policy tightens and interest rates rise, economic growth will temper while the cost of capital for companies increases. This can be a lethal combination for smaller tech companies that have yet to establish their business models or a path to profitability, because plugging the funding gap with fresh debt and equity will become much more costly. 

Pollak points to the 17.8% underperformance of the Russell 2000 against the S&P500 over the past year. The Russell 2000 is an index of small to mid-cap US companies.

He says: “Quality companies will more easily pass on to consumers the cost increases caused by inflation and supply-chain disruption.”

Go for growth and disruption in tech shares

Pollak likes tech shares that are well-positioned to benefit from long-term industry disruption.

He says: ” … the promising outlook of quality global technology companies benefitting from secular trends remains a hard act to follow”.

Pollak explains:

Where quality mitigates the effect of the inflation and supply-chain disruption, positive secular industry trends provide a path onwards and upwards. 

During the GFC, a number of key disruptive trends were working their way through the economy. Smartphones were becoming ubiquitous, the fledgling e-commerce sector was growing strongly, online advertising was taking shape and TV, movie and music streaming began to benefit from faster download speeds. 

In the end, the disruptive secular trends benefiting these companies outstripped the macroeconomic headwinds. This resulted in stock outperformance. 

The secular trend in technology today is towards increased computational power — that is to say, semiconductor devices, solid-state storage and networking products. 

In terms of best tech share picks, Pollak highlights three international companies, Nvidia Corporation (NASDAQ: NVDA), Advanced Micro Devices, Inc. (NASDAQ: AMD), and the Taiwan Semiconductor Manufacturing Co Ltd (NYSE: TSM).

He likes them because they have strong balance sheets and cash flow, do not require additional financing, and are buying back their own shares.

What about ASX tech shares?

Here are some recent recommendations on ASX tech shares from a couple of expert brokers.

As we reported last week, Citi says the two ASX 200 tech shares likely to navigate a softening economy and demand weakness best are NextDC Ltd (ASX: NXT) and WiseTech Global Ltd (ASX: WTC).

Bell Potter’s best ASX tech share picks are TechnologyOne Ltd (ASX: TNE), Life360 Inc (ASX: 360), and Nitro Software Ltd (ASX: NTO).

Let’s go back to that four-week patch test for ASX tech shares. How are these picks doing to date?

• NextDC share price up 9.4%
• WiseTech share price up 11.8%
• TechnologyOne share price up 2.1%
• Life360 Inc share price up 28.6%
• Nitro Software share price up 6.9%.

Make of this what you will.

The post Has a turnaround already begun for ASX tech shares? Experts reveal the outlook for FY23 appeared first on The Motley Fool Australia.

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More reading

• Here are the 3 most heavily traded ASX 200 shares on Tuesday
• These were the best (and worst) performing ASX 200 sectors of FY22
• What were some of the key lessons for ASX investors in FY22?
• ASX 200 midday update: Zip scraps Sezzle merger, Lake Resources’ short seller attack
• Broker gives its verdict on the WiseTech share price

Motley Fool contributor Bronwyn Allen has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has positions in and has recommended Advanced Micro Devices, Life360, Inc., Nvidia, Taiwan Semiconductor Manufacturing, and WiseTech Global. The Motley Fool Australia has positions in and has recommended WiseTech Global. The Motley Fool Australia has recommended Nitro Software Limited, Nvidia, and TechnologyOne Limited. 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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