Australian technology stocks are facing headwinds beyond just anticipated interest rate rises, according to fund managers. While the rate-sensitive sector often reacts to inflation data and potential cash rate adjustments, worsening sentiment and investor dissatisfaction with stock-based compensation are weighing heavily on the ASX’s listed technology companies. The rise of artificial intelligence and its potential impact on the future growth of software businesses is also creating uncertainty. Forager Funds chief investment officer Steve Johnson noted that these factors are more significant than a 25-basis-point rate hike. Forager Funds is an Australian fund management firm managing approximately $470 million, previously holding 40% of its portfolio in tech stocks, now significantly reduced.
Tech stocks have underperformed the broader market significantly this year, down 11 per cent since January, while the S&P/ASX 200 has gained 1.6 per cent. Leading the decline are major players like WiseTech Global, a logistics software company, and Xero, an accounting platform, which are down 13.9 per cent and 15.7 per cent respectively since the beginning of the year. Previously, Bell Potter analysts reported that the sector had already experienced a 21 per cent decline in the 12 months leading up to December 31, ranking as the second-worst performing industry, only surpassed by healthcare.
Plato Investment Management’s David Allen highlighted that domestic tech stocks are especially susceptible to interest rate increases because of inflated valuations and dim growth prospects. The $3 billion Global Alpha Fund, managed by Plato, is underweight or short on tech stocks, as Allen believes a scarcity of genuine growth companies inflates valuations. Moreover, Forager’s Johnson pointed out that stock-based compensation practices are deterring investors. Many companies, he argued, are allocating substantial stock to employees without factoring it into their adjusted financial results.
Despite these challenges, some remain optimistic about the sector’s prospects. Ausbil’s Chris Smith noted that companies like Xero, WiseTech, and TechnologyOne are incorporating AI into their offerings. RBC Capital Markets analyst Garry Sherriff suggested that several large-cap software stocks, including TechnologyOne, WiseTech, and Xero, are poised to outperform in the coming year, citing AI-driven product development as a potential growth catalyst.
