Why investors should reduce their exposure to ASX tech shares in 2022: expert

Rising interest rates will put pressure on companies valued for their far future potential earnings.

Bernd Struben

Bernd Struben earned his BA in economics from the University of Michigan in 1991, with post-graduate studies in environmental economics at the University of Connecticut. Over the years he’s written about and analysed the tourism industry in the Caribbean; Europe’s commercial real estate markets; and, since moving to Australia in 2010, global and Aussie share markets. Bernd studies geopolitical and macroeconomic trends, alongside sector and company specific data, to gauge what he believes could be tomorrow's best investments. In his free time, you might find Bernd at the beach with his family or working on his next science fiction novel.

Published March 17, 2022 9:30 am AEDT

ASX tech shares, as whole, haven't exactly shot the lights out in 2022.

To say the least.

Here's what we mean.

Since the opening bell on 4 January, the S&P/ASX 200 Index (ASX: XJO) has lost 5.4%.

That's not great.

But it sure beats the 22.1% year-to-date loss posted by the S&P/ASX All Technology Index (ASX: XTX).

Which sectors haven gained while ASX tech shares have tumbled?

So, which sectors have been making hay even as ASX tech shares have come under selling pressure?

With skyrocketing energy and commodities prices, you likely won't be surprised by the answer.

Year-to-date the S&P/ASX 200 Resource Index (ASX: XJR) has gained 2.2%. Not at all bad in less than 3 months' time.

Yet the S&P/ASX 200 Energy Index (ASX: XEJ) has raced far higher, gaining 15.3% so far in 2022.

Does that mean the boat has sailed on energy and resource shares and investors should increase their exposure to ASX tech shares?

Not according Jessica Amir, Saxo Markets Australian market strategist.

Time to run the slide rule over your portfolio?

According to Amir, "The Aussie market is searching for direction, and has tracked sideways for 3-months now, awaiting the next big catalyst."

Amir says that uncertainty over how fast central banks will raise interest rates is holding markets back.

"When it comes to the central banks, markets are still in the dark and want to price in how many rate rises will be made in the US, and in Australia," she said.

Which brings us back to ASX tech shares.

According to Amir, "Given profits will be squeezed when rates rise, money has continued to come out of tech … this year and instead go into energy – oil, gas and coal – stocks."

Amir continued:

The Australian Bureau of Statistics alluded to companies' profit growth being squeezed, from Omicron, higher wages and oil prices. Just imagine what will happen if rates rise 4 times to companies that were born from zero interest rates?

This is why we advocate for investors to reduce their exposure to tech, and continue to favour commodities, given lack of supply and rising demand overtime.

ASX tech shares broadly led yesterday's rally. However, many of them are valued with far future earnings growth in mind, which could place them under renewed pressure as investors eye rate increases.

As the cost of money rises, some of those values may look increasingly stretched.

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