If you own ASX shares in the technology and healthcare sectors, your portfolio is likely looking green around the gills at the moment.
While the general S&P/ASX 200 Index (ASX: XJO) is down more than 6% this year, the S&P/ASX All Technology Index (ASX: XTX) has plunged a shocking 18% while the S&P/ASX 200 Health Care Index (ASX: XHJ) has lost 14%.
And to rub it in, the S&P/ASX 200 Resources Index (ASX: XJR) is actually 4% higher now than when 2022 started!
Now, we know that the brutal falls in January were triggered by fears that interest rates in the US and Australia would head up.
But why is the market picking on specific sectors? Wouldn't interest rate rises be detrimental for everyone?
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When money is more expensive, it's harder to keep it locked up
Shaw and Partners portfolio manager James Gerrish this week explained why tech and health have been hit so hard in the recent dip.
Because they are industries that heavily involve innovation, tech and health sectors tend to host growth stocks rather than the more conventional value shares.
And the worth of a growth stock is very much dependent on its future outlook.
"Because they are growing strongly, investors are prepared to pay a higher price for the earnings stream against a company that has solid earnings now but with little growth," Gerrish told his Market Matters newsletter.
"With specific reference to high-value growth type stocks, the easiest way to think about it is that we are investing a dollar now on the expectation that earnings will grow strongly in the future."
Therefore, when borrowing costs are low, the opportunity cost of having investors' money locked up in a company for years is cheap.
"But when rates rise, the opportunity cost also goes up — making it less appealing."
Snap up those bargains while they're cheap though
Despite the recent hammering of growth shares, Montgomery Investment Management chief investment officer Roger Montgomery reminded investors that, over the longer term, rising rates have not historically prevented shares from trending upwards.
As an example, he referred to how the S&P 500 Index (SP: .INX) moved from 2015 and 2018.
"Short-term rates were lifted 9 times and yet the market rallied," Montgomery said in his blog.
"Provided… you own companies that are high quality, growing and increasing their intrinsic value, then even rising rates won't be enough to keep the share price from eventually reflecting its worth."
This is all to say that he reckons it's time to buy up bargain ASX shares, even though no one knows whether the carnage has finished.
Inflation would not be persistent, according to Montgomery.
"Wages will eventually be under pressure again," he said.
"And given the very high levels of household debt, a few short and sharp rate hikes may be all that is necessary to put the inflation genie back in its bottle."
