Why the ASX tech share rally can run well into 2021

Having had a stellar run in 2020, some analysts forecast that the ASX tech share rally is over. But these facts may surprise you.
The post Why the ASX tech share rally can run well into 2021 appeared first on The Motley Fool Australia. –

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“Reports of my death have been greatly exaggerated,” Mark Twain famously quipped.

After falling ill in England, Twain’s obituary was published in the United States. Rather prematurely, it turned out. Forcing him to write a letter proclaiming he was very much alive.

Some analysts have been sounding a similar premature death knell for the outlook of technology shares in 2021.

The reasoning goes that, following a stellar run in 2020’s coronavirus-plagued ‘work, shop and socialise from home’ world, tech shares are likely to underperform in 2021 as the world reopens.

Top 3 ASX 200 tech shares

Now it’s true that tech shares have had a stellar run since the rebound from the March lows.

In the US, the tech heavy Nasdaq Composite (NASDAQ: .IXIC) is up 80% from 23 March.

It’s a similar story with ASX technology shares.

The S&P/ASX All Technology Index (ASX: XTX) – which tracks 50 of Australia’s leading and emerging technology shares – is up a whopping 132% since 23 March.

But there are few signs yet to proclaim that strong performance is over. On Tuesday, the Nasdaq closed at yet another new record high, posting 10 straight days of gains.

And yesterday, the All Tech also closed for a new all-time high.

In fact, 3 of the 10 best performing shares on the S&P/ASX 200 Index (ASX: XJO) in 2020 are technology shares.

BNPL darling Afterpay Ltd (ASX: APT) leads the charge. Afterpay’s share price is up 228% year-to-date.

Data centre operator Nextdc Ltd (ASX: NXT) also makes the top 10 performers list, with the share price up 78%.

The third ASX tech share to make it into the top 10 gainers on the ASX 200 this year is cloud-based accounting software provider Xero Limited (ASX: XRO). Xero’s share price is up 74% year-to-date.

What’s happening with tech share prices today?

Markets never go up in a straight line. And tech shares are certainly no exception.

Yesterday (overnight Aussie time) all 3 major US indexes lost ground. The Nasdaq suffered the biggest fall, losing 1.9%.

As tends to be the case, ASX shares are following the US lead lower.

At time of writing, the ASX 200 is down 0.4%. And tech shares are falling harder here as well, with the All Tech index down 1.8%.

But as long-term investors, you shouldn’t get overly hung-up on daily price swings.

The losses we’re witnessing on our screens right now mostly come down to any lack of progress on the next multi-trillion-dollar US stimulus package.

But that doesn’t mean the stimulus package won’t be passed… eventually.

As Mark Heppenstall, chief investment officer for Penn Mutual Asset Management, says (quoted by Bloomberg):

To the extent they can’t come to an agreement on stimulus given the heightened urgency, given the recent outbreak, that’s a bad message. I do think stimulus is coming and I think the market was more prepared for it to be this year than next year.

Diana Mousina is a senior economist at AMP Capital, a subsidiary of AMP Ltd (ASX: AMP). Speaking at AMP’s webinar yesterday, she said she also believes a US stimulus package is forthcoming. And this hasn’t been fully priced into share markets yet:

When it is passed, I do expect that share markets will have another leg up. Because there’s always some concern that it may not get there… Of course, if you don’t see it getting passed, that will be a negative for share returns.

It’s not just technology shares with a bright outlook

While the reports of the death of technology shares may be greatly exaggerated, that doesn’t have to come at the expense of cyclical shares.

As the Australian Financial Review reports, LPL Financial is forecasting moderate gains for share markets in 2021. Its analysts wrote:

We see an S&P 500 Index fair value target range of 3,850–3,900 in 2021 with potential for further upside if the production of a vaccine exceeds expectations. Growth-style stocks may continue to perform well next year, but we expect participation to broaden, which could boost cyclical value stocks. Early-cycle positioning and prospects of a strong earnings rebound may provide a tailwind to small caps.

And then there’s this conclusion from global market strategists at JPMorgan Chase & Co, reported by Bloomberg.

The strategists, led by Nikolaos Panigirtzoglou, expect to see a US$600 billion (AU$810 billion) increase in demand for shares in the year ahead, largely driven by retail investors. Topping that off, they expect the supply of shares to fall by US$500 billion, mostly driven by an increase in share buybacks alongside less capital raising activity.

“This is similar to the equivalent equity demand/supply improvement in 2019 relative to 2018 which at the time had seen global equities rising by around 25%,” JPMorgan said.

Happy investing.

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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 Xero. The Motley Fool Australia owns shares of AFTERPAY T FPO. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

The post Why the ASX tech share rally can run well into 2021 appeared first on The Motley Fool Australia.

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