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Tags: Ideas in Finance
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Ideas in Finance - 2023: Tech and the Rest

If you read finance Twitter, there has been a lot of doom and gloom through 2022 and into the first part of 2023. A lot of it was justified. Most of the tweets had data to support their argument. The economic situation has appeared shaky. Interest rates rising. Inflation persistent.

And the financial economy looked even worse, especially with the mini banking crisis in America in March 2023. Yet, stock indices pushed higher and by June you could see that most of the commentators were frustrated, though never lost for words. 

While their analysis of the macroeconomy was sound for the most part, what they did not see coming was the AI stock boom. Nvidia was the standout example. Its stock appreciated by 196% between January and the beginning of July, up $279 a share to $423. Another stunner was Tesla, which is just as much of an AI/tech company as it is a car company. Its stock was up 142%. Even established titans like Apple pushed higher, despite people calling their peak years ago. Apple stock finished June up 55% for the first six months of the year, giving the company a market capitalisation above $3 trillion. To these three examples, we could add just another half-dozen.

Together, those 10 or so companies were almost solely responsible for pulling the NASDAQ and the S&P500 upwards, despite all the economic headwinds the commentators were tweeting about (and which really have impacted the stock prices of most other companies to some extent). 

The NASDAQ had its best start to a year since the early 1970s. This was in stark contrast to 2022, when we noted that stocks had had their worst start to a year in fifty years. The NASDAQ rose 32% in the first six months of 2023. The broader S&P500 rose almost 17%. Both were pulled higher by a small number of tech stocks, providing an important lesson for those who rely on “top down” analysis to guide their investment decisions. While the broader economy looked weak because it is, there is always a bull market somewhere. 

In Australia, our ASX200 has not had a super start to the year. However, even the 3% increase between January and June was better than 2022, when the index was still down about 1,000 points by September (about 13% down from the end-2021 level).

Has the Australian tech sector emulated the American experience for the first half of 2023?

Yes, it has. The ASX All Technology Index (XTX) is up 22% for the first half of 2023. This index was led higher by companies like Megaport (up 19% in the six months to July 1), Xero (up 70%), and WiseTech (up 62%).

As late as the mid-2000s, Australians had limited choice, especially in the tech sector. This has changed a lot. In addition, accessibility to global leaders in tech has never been better. A large number of managed funds, index funds, and ETFs give Australian investors enough choice to select a product that is just right for them, whether that’s an index fund that tracks the NASDAQ or a “themed” ETF that focuses its holdings on no more than 10 or 20 stocks. If there’s always a bull market somewhere, it’s never been easier to participate. However, as many a professional market commentator can tell you, it’s never going to get easier to anticipate just where and what that bull market will be. 

Discussion Question

Given what we have said, what are the merits of combining a top down with a bottom up analysis when building and managing a portfolio? 

6 July 2023