While the broader Australian stock market has been holding up well in the last year, the Australian technology sector, like its US counterpart, has technically crashed. By mid-May, the Australian tech sector had effectively fallen back to pre-COVID levels and taken with it the hopes of many investors who had jumped into technology stocks following the COVID crash.
It is highly unusual to see any sector crash twice in the space of two years, yet the Information Technology sector fell 49% from a high in February 2020 into the COVID low of March 2020. It then rose nearly 200% over the following year into February 2021, as new investors and traders flooded the market attempting to cash in on the rise. It then fell away for a short period of time and after making a new all-time high in August 2021, it fell 44% into May 2022.
It is nearly 11 years since a fall of this magnitude occurred in the tech sector, when it fell 42% from April 2010 into August 2011.
Interestingly, three years earlier the technology sector fell 50% during the GFC from May 2007 into a low in December 2008. So, it’s evident that the tech sector is quite volatile with large swings in price, which is great if you are a trader but not so much if you are an investor holding over the longer term.
That said, the technology sector has been the best performing sector in our market since the GFC crash, as it is up over 300% since December 2008.
It’s important to remember that the tech sector is one of the smallest in the All Ordinaries Index with 87% of the companies having a market capitalisation under $100 million while 70% have a market cap under $50 million.
When you compare these figures to the top five companies in this sector, who have a total market capitalisation of $60 billion, you start to understand how top heavy this index is and how speculative many of the companies are, which is why it pays to understand what you are doing if you decide to trade stocks in this sector.
Dale Gillham is Chief Analyst at Wealth Within and international bestselling author of How to Beat the Managed Funds by 20%. He is also author of the award winning book Accelerate Your Wealth—It’s Your Money, Your Choice, which is available in all good book stores and online at www.wealthwithin.com.au