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Why ASX 200 technology shares are again racing higher

Leading ASX 200 technology shares are again charging higher, following similar patterns of outperformance in global share markets.
The post Why ASX 200 technology shares are again racing higher appeared first on Motley Fool Australia. –

rise in asx tech share price represented by digitised rocket shooting out of person's hand

Leading ASX 200 technology shares are again charging higher. It’s the same pattern we’re seeing with the share price gains among the international tech giants.

All of the so-called FAANG stocks are up more than 8% so far this week.

The Alphabet Inc Class C (NASDAQ: GOOG) share price is up 8.8% since Friday’s closing bell. And the Facebook, Inc. Common Stock (NASDAQ: FB) share price has soared 11.7%.

Here in Australia, the S&P/ASX All Technology Index (ASX: XTX) – which contains 50 of Australia’s leading and emerging technology companies – is up 7.1% for the week so far.

Buy now, pay later giant, Afterpay Ltd (ASX: APT)’s shares have gained 7.8%. And business and accounting software provider Xero Limited (ASX: XRO)’s share price has rocketed 9.9% higher.

Both tech shares are currently trading at new all-time highs. And they’ve far outpaced the gains on the S&P/ASX 200 Index (ASX: XJO), which itself is up an impressive 4.2% this week.

So why is the broader share market posting strong gains, and why are tech shares again leading the way up?

It comes down to 2 opposing sides of Adam Smith’s invisible hand working together.

You may be familiar with Smith’s economic theory, one he first wrote about way back in 1759.

In a nutshell, Smith said that if people follow their own self-interests, without government or other interventions, free market forces tend to bring about the best outcome for society as a whole. Such as rising share prices.

What we’re seeing with the booming tech shares this week, however, is partly the market embracing new hopes for that invisible hand… and partly markets banking on the continuation of a very visible hand.

Confused?

Let me explain.

Fading, if not invisible, regulatory and tax hand

Early results from the US elections indicate Joe Biden as the likely next president, while Republicans look like they’ll hold a slim majority in the Senate.

That’s important because without control of both congressional houses the Democrats are unlikely to be able to raise corporate and capital gains taxes. They’ll also find it harder to push through tough new regulations on the big tech companies.

As Bloomberg reported this morning, “Investors bought into technology and health-care firms on bets the U.S. election results mean no major tax hikes or regulatory changes that could derail those sectors.”

The article quotes Tracie McMillion, head of global asset allocation strategy for Wells Fargo Investment Institute, who says:

We’re seeing a resumption in leadership from technology. It appears markets really like the combination they think is most likely in terms of leadership going forward and that would be a Biden presidency with a Republican Senate.

Without strict new regulations and higher tax burdens, Gary Bradshaw, a portfolio manager at Hodges Capital Management in Dallas, is also bullish on the bigger technology shares (quoted by Bloomberg):

In a very low interest environment, you want to own companies that are growing. Those companies have put up the best growth, the best free cash flow on the market and, in my opinion, they’re going to keep growing. If you don’t have a government that’s going to be riding them and breaking them up and taxing them into oblivion or taxing shareholders that own them, megacap tech’s going to keep rolling.

And according to Victoria Fernandez, chief market strategist for Crossmark Global Investments, tech shares could well continue their run higher. Fernandez says the removal of pre-election uncertainty should offer some ongoing tailwinds for leading tech shares:

As we hopefully get past that over the next couple of days, we can see tech settle in and continue to have that climb higher. It’s difficult to not have any tech in your portfolio.

So that gives us a good idea of how an invisible – or at least far less visible – hand is helping drive share markets, and tech shares in particular, higher.

But in today’s pandemic hobbled world, shares aren’t ready to stand entirely on their own free market feet.

The very visible stimulus hand

With much of the world entering new lockdowns to combat the spread of COVID-19, and Australia only just emerging from its own economic hibernation, businesses and households alike continue to depend on fiscal (government) and monetary (central bank) stimulus to keep from sinking.

Without record government spending packages, near zero interest rates, and unprecedented quantitative easing (QE) programs from global central banks, share prices would almost certainly still be dwelling near the March lows… or lower.

And just as the pandemic is entering its second or even third wave, we can expect fresh waves of stimulus from the developed nations to support their economies.

In Europe, for example, as the Australian Financial Review reports:

European Commission Vice-President Valdis Dombrovskis called on EU leaders to quickly sign off the €750 billion ($1.2 trillion) recovery fund agreed in the middle of the year, to help the punch-drunk Continent get back on its feet.

“I call again on the European Parliament and Council to wrap up negotiations quickly for money to start flowing in 2021 so that we can invest, reform and rebuild together…”

The European Central Bank (ECB) has already joined the globe’s other leading central banks in dialling up its QE, buying some 1.4 trillion euros of bonds from the eurozone nations. The ECB is widely expected to continue, or even increase its bond purchases next month.

Earlier this week the Reserve Bank of Australia (RBA) not only cut the cash rate from 0.25% to 0.10%, it also announced its intent to buy $100 billion of government bonds over the next 6 months.

Yesterday (overnight Aussie time) the US Federal Reserve left its official rate at 0.25%. And it signalled it will continue to buy US$120 billion (AU$167 billion) of US bonds and mortgage-backed securities ever month.

That’s over AU$2 trillion per year.

And the Fed could always do more.

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Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool’s board of directors. Randi Zuckerberg, a former director of market development and spokeswoman for Facebook and sister to its CEO, Mark Zuckerberg, is a member of The Motley Fool’s board of directors. Bernd Struben has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of and recommends Alphabet (C shares) and Facebook. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool Australia has recommended Alphabet (C shares) and Facebook. 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.

The post Why ASX 200 technology shares are again racing higher appeared first on Motley Fool Australia.

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