Why Xero and Afterpay shares bounced yesterday

Shares in Xero Limited (ASX: XRO) and Afterpay Ltd (ASX: APT) climbed higher yesterday – but is now the time to buy?

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The S&P/ASX 200 Index (INDEXASX: XJO) bounced back yesterday led by Xero Limited (ASX: XRO) and Afterpay Ltd (ASX: APT) shares.

The benchmark index gained 44.20 points (0.69%) yesterday after seven straight trading days of losses. It was the ASX tech shares that led the way on Tuesday as the Information Technology sector gained 2.46%.

So what was driving Aussie tech shares higher yesterday and is there a rebound ahead for the ASX?

Why Xero shares climbed higher yesterday

Xero shares were the biggest gainers amongst the ASX 200 after closing 7.17% higher at $79.94 per share. The accounting software group didn't release any market-moving news but that didn't stop investors from buying up big. However, it could just be that investors are buying back in after the last week or so of selling.

Concerns over the impact of the coronavirus outbreak have hammered share markets in recent days. That's seen broad-based selling in Australia and abroad but Tuesday was a change of tune. I personally think it could just be a "dead cat bounce" where markets are volatile and see short-term gains amid a broader downward trend.

However, Xero shares have done well to hold their value while other ASX 200 shares slumped 20% or more in February. That could be down to its strong growth profile and diversified earnings across the globe. The software group continues to grow strongly and Xero's half-year subscribers increased by 30% to over 2 million, with UK subscribers jumping by 51% to 536,000.

Afterpay shares saw a similar surge

It was similar for Afterpay shares as they climbed 6.19% despite no news from the buy now, pay later group. Afterpay was the fourth best performing ASX 200 share on Tuesday as investor demand surged.

I still would be wary of buying Afterpay at its lofty valuation, particularly given the regulatory risks and growing competition. However, Afterpay shares have surged higher over the last 2 years and have a lot of momentum behind them.

Foolish takeaway

Neither of these ASX 200 shares have particularly large earnings profiles based in China which could explain some of yesterday's buying. However, I would be wary of buying Xero or Afterpay shares at the moment given coronavirus impacts remaining unknown.

Kenneth Hall has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of AFTERPAY T FPO. The Motley Fool Australia owns shares of Xero. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. 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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