No WAAAXing lyrical, it's not tech stocks that are powering the ASX
Investors in Australia's technology sector have been urged to take a cautious approach after the All Ordinaries Index broke through its highest ever level on Thursday.
Analysts and experts said that despite significant focus on the country's technology market darlings, it has been "some of the more boring stocks" that have pushed the market to new highs.
The All Ordinaries touched a new record high during morning trading hours on Thursday, marking the recovery from the global financial crisis after more than 11 years, with the S&P/ASX 200 just shy of its respective all-time high. Both indices have gained just over 20 per cent this year.
Yet looking beyond the broader market gains, "tech really is still a small slice of the overall picture", said Sean Sequeira, chief investment officer of Australian Eagle Asset Management.
"What has driven the market has been some of the more boring stocks" such as the big banks and miners, he said.
Analysts pointed to a post-election boost in banking stocks and a recovery in the resources sector as the two key factors driving the market gains.
The information technology subsector has seen its shares jump 28 per cent so far this year. The resources subsector is up by 25 per cent, but due to market heavyweights such as BHP and Rio is having a far bigger impact.
'Nosebleed premiums'
There's no bull market without its market darlings: Australian investors have watched the so-called "WAAAX" portfolio of stocks - Wisetech, Afterpay, Altium, Appen and Xero - closely over the past year, with share prices for each of these companies having at least doubled in that time.
Yet in lead-up to the market highs, fund managers said they were taking a cautious approach to the tech sector, given many of its investors were expecting big returns despite the fact that many of the stocks were already trading at pretty steep prices.
"There’s FOMO [fear of missing out] at the moment that is very acute in the tech space," said Wilson Asset Management lead portfolio manager Martin Hickson.
"If you look at the performance of the WAAAX stocks, they are trading at huge valuations - at an average revenue multiple of 18 times. And [for context], around the time of the dotcom bubble, on the Nasdaq the highest multiple the top five largest stocks got to was around 20 times," he said.
As Lincoln Indicators executive director Elio D'Amato sees it, many companies in the sector have "been trading at nosebleed premiums for some time".
"The stocks have performed very very well and if they do not meet expectations, there is a risk the market will sell them down quite aggressively. That said, we are in a general low-growth environment and these stocks offer very strong market growth," he said.
Global market reach
The approach to searching for value in the information technology sector should not change, regardless of where the broader market is sitting, experts warned.
A low interest rate environment means investors are looking to equities for strong returns, and to technology stocks in particular, said Bailador Technology Investments CEO David Kirk.
"It’s very natural for human beings to want to be part of big success stories," Mr Kirk said.
Businesses in the IT sector often gained their significant market valuations because they exhibited untapped global potential, he said. But investors have to evaluate whether a company actually has the market opportunity ahead of it that it claims to have, he advised.
Investors need to consider the long-term appeal that a technology stock offers, Morgans equity strategist Andrew Tang said a few days before the market reached its highs.
"They need to understand the sustainability of the technological advantage, the experience of the management team and the cash flows supporting the growth profile," Mr Tang said.
"The danger with [pricey] stocks is the possibility of missing heightened expectations, which is often accompanied by a severe share sell-off."