ASX 200 tech shares are broadly off to a strong start in the second quarter of the 2023 financial year (Q2 FY23).
The S&P/ASX 200 Index (ASX: XJO) is up 2.7% in the early days of Q2 FY23. Using that as our benchmark, let's check how tech stocks are tracking since the end of September.
Embattled buy now, pay later (BNPL) stock Block Inc (ASX: SQ2), which acquired Afterpay in January, has handily beaten that return, gaining 4.9% so far in Q2.
Accounting software provider Xero Ltd (ASX: XRO) hasn't managed to hold onto to some strong gains posted in the first week of the quarter. It's currently down 0.5% since the closing bell on 30 September.
Meanwhile, ASX 200 tech share WiseTech Global Ltd (ASX: WTC), which provides cloud-based software solutions for the logistics sector, has also edged out the benchmark, up 3.8% so far in Q2.
And we'll leave off with administration services company Link Administration Holdings Ltd (ASX: LNK), our top performer in Q2, up 10.8% so far.
How have these companies performed heading into the new quarter?
The first three quarters of the calendar year (as opposed to financial year, which ends on 30 June), were less than kind to ASX 200 tech shares.
Over the nine months through to 30 September:
- The Xero share price fell 49.7%
- The WiseTech share price dropped 13.3%
- The Square share price (commencing from its 20 January ASX listing) slid 52.1%, and
- The Link share price fell 49.7%
The benchmark index dropped 14.4% over the same period.
While there are company and sector-specific differences that impact these ASX 200 tech shares in unique ways, one factor threw up some gale-force headwinds for all.
Yep, we're talking about central banks aggressively ratcheting up interest rates for the first time in more than a decade to combat soaring inflation.
This has seen the Reserve Bank of Australia (RBA) raise rates from the historic low of 0.10% to the present 2.60%. The US Federal Reserve has hiked rates to 3.25%, and other leading global central banks have also moved to rapidly raise their own rates.
What's the outlook for ASX 200 tech shares in Q2?
With the interest rate dilemma in mind, the broad outlook for ASX 200 tech shares in the new quarter will hinge on the rate rises we see from the RBA and the highly influential Fed — and to a lesser extent other global central banks.
Tech stocks are particularly vulnerable to rate increases, as most of these companies are priced with distant future earnings growth in mind. As interest rates rise, so too does the present cost of investing in those future earnings.
As we wrote last week, 5 October, ASX 200 tech shares had a stellar two-day run "as signs emerge that a series of rate increases in the US, the world's biggest economy, is having some impact on slowing the pace of inflation. That could mean the US Fed won't need to hike rates as aggressively as the market has priced in".
Their performance was further boosted by a lower-than-expected 0.25% rate hike from the RBA on 4 October.
But that picture was flipped upside down a few days later.
Yesterday, 10 October, ASX 200 tech shares led the charge lower.
Why?
Because the September jobs data out of the US, the world's top economy, was stronger than expected. Unemployment is at 50-year lows and wages are growing at 5% annually.
This seemingly good news wasn't good news for the rate-sensitive tech sector, as markets rapidly repriced in further sharp rate increases from the Fed.
Those expectations were bolstered by Fed Governor Christopher Waller. "Until we see any signs of inflation beginning to moderate, I don't know how we pause," he said.
So, investors wondering how ASX 200 tech shares are likely to perform in the new quarter would do well to keep a close eye on inflation expectations out of the United States and here in Australia.
Once central banks can start easing off their hawkish paths, the well-placed companies should enjoy some strong runs, like we just witnessed last week.
