The case for greater tech exposure in Australian equity portfolios

10 September 2024

Australian tech shares hit an all-time high in August 2024 and may be on track for further gains given investors’ growing interest in a relatively underrepresented sector in the country’s equity market. The increasing likelihood of interest rate cuts by the US Federal Reserve further brightens the outlook for growth stocks in Australia and beyond given that high borrowing costs tend to put a crimp on investment in technology and innovation.

In the US, the so-called “Magnificent Seven” giant technology companies – Apple, Alphabet, Amazon, Meta, Microsoft, Nvidia and Tesla – have had an outsized impact on equity market performance over the past decade. They now dominate the list of the country’s biggest stocks by market capitalization,^[1] which 15 years ago featured the likes of Exxon Mobil, General Electric and Johnson & Johnson.^[2]

Australia’s stock market, by contrast, has yet to see the same compositional shift. Financials and resources companies continue to make up the bulk of local equity market capitalization, with the S&P/ASX information technology index accounting for just 3% of the total.^[3]

Are Australian investors missing out on tech gains?

Because tech companies are relatively underrepresented within Australian stock indexes, local investors tend to have comparatively low exposure to them. So, while US tech stocks have proven some of the biggest wealth-creating investments of the past century, Australian investors may be losing out.

An investment strategy focused on Australia’s best-known tech companies — including WiseTech, REA Group, Xero, CAR Group, Pro Medicus, TechnologyOne and Megaport — would have proven exceptionally lucrative over the past decade. A portfolio equally weighted to each of these seven stocks from the date of WiseTech’s listing in April 2016 would have yielded a return well over 1,000% — around 10 times more than the Vanguard Australian Shares Index ETF over the same period.^[4]

Looking past these seven, the overall return of Australia’s technology stocks since 2016 is about double that of the broader market.^[5] Some overseas investors seem to believe the sector is undervalued: over the past five years, foreign businesses have acquired several Australia-listed tech companies and taken them private.^[6]

Examples include Afterpay, a major Australian deferred payment service operator, which was delisted in 2022 after being acquired by a US-listed company,^[7] and software firm Altium, which ceased trading in August 2024 after being bought out by Japanese chipmaker Renesas.^[8] In all, 88 tech companies were delisted from 2019 and 2023, outnumbering the 79 new listings.^[9]

There are signs that the valuation tide may be turning. Logistics software provider Wisetech’s strong financial performance^[10] enabled it to finally break into the ranks of the top 20 Australian companies with a market cap of around A$40 billion in August 2024.^[11]

AustralianSuper, the country’s largest pension fund manager, has also been shifting money into equities on the expectation that artificial intelligence will fuel further gains in tech stocks.^[12]

AustralianSuper Chief Investment Officer Mark Delaney commented to Bloomberg that the current tech stock boom prompted by the advance of AI and cloud computing could play out in the same way as previous periods of innovation, such as the introduction of computing, the internet and mobile phones, which led to sustained appreciation of related stocks for five to 10 years.^[13]

A gap in Australian portfolios?

In some ways, Australia’s tech companies have flown under the radar, even though they have significant local reach, many dominate their respective markets, and some have achieved strong profitability.

Xero, for example, is a leader in cloud accounting software in not only Australia, but also the UK and New Zealand.^[14] Nearly three million Australians visit REA Group’s online property listing platform every day; 42 million visit CAR Group’s auto marketplaces each month;^[15] and hundreds of millions of job applications are placed through SEEK’s platform each year.^[16]

Meanwhile, medical imaging firm Pro Medicus,^[17] network-as-a-service solutions provider Megaport^[18] and enterprise software company TechnologyOne^[19] have reported impressive profit growth and surpassed analysts’ growth expectations. Also worth mentioning is data center operator NextDC, which has garnered considerable investor interest amid surging demand for its services driven by the global shift to cloud computing and rise of AI.

Australia’s fast-growing tech sector presents several exciting growth opportunities, but so too does its mainstay resources sector, which will play a vital role in enabling the world to achieve a greener and more technologically advanced future.

Securities-backed financing can allow investors to remain invested in the tried-and-true drivers of Australian investment returns, while diversifying into new sources of growth. EquitiesFirst offers a flexible and convenient specialty financing solution that allows long-term shareholders to use their equities to access cost-effective capital and retain the upside potential of their underlying holdings.

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[1] https://finance.yahoo.com/news/invested-7k-magnificent-7-stocks-170101762.html

[2] https://www.smh.com.au/money/investing/australian-shares-beating-out-global-peers-over-the-very-long-run-20230814-p5dw98.html

[3] https://www.afr.com/wealth/personal-finance/aussie-tech-stocks-that-could-supercharge-a-portfolio-20240617-p5jmhg

[4] https://www.afr.com/wealth/personal-finance/aussie-tech-stocks-that-could-supercharge-a-portfolio-20240617-p5jmhg

[5] https://www.afr.com/wealth/personal-finance/aussie-tech-stocks-that-could-supercharge-a-portfolio-20240617-p5jmhg

[6] https://asia.nikkei.com/Business/Markets/Australian-stock-market-faces-tech-company-exodus

[7] https://block.xyz/inside/press-release-afterpay-acquisition

[8] https://www.altium.com/company/newsroom/press-releases/renesas-completes-acquisition-altium

[9] https://asia.nikkei.com/Business/Markets/Australian-stock-market-faces-tech-company-exodus

[10] https://www.crn.com.au/news/wisetech-reports-strong-financial-results-and-positive-outlook-610869

[11] https://www.asx.com.au/markets/trade-our-cash-market/equity-market-prices/top-50-market-cap

[12] https://www.bloomberg.com/news/articles/2024-07-03/australia-s-largest-pension-fund-shifts-to-equities-on-tech-boom

[13] https://www.bloomberg.com/news/articles/2024-07-03/australia-s-largest-pension-fund-shifts-to-equities-on-tech-boom

[14] https://www.xero.com/hk/media/factsheet/

[15] https://data-api.marketindex.com.au/api/v1/announcements/XASX:REA:3A623106/pdf/inline/rea-group-investor-and-analyst-presentation-fy23

[16] https://data-api.marketindex.com.au/api/v1/announcements/XASX:SEK:3A628400/pdf/inline/2023-annual-report

[17] https://www.capitalbrief.com/briefing/pro-medicus-posts-365-profit-rise-ceo-hails-record-year-4a60e4af-50e0-479c-a943-899a44f50ba0/

[18] https://finance.yahoo.com/news/megaport-full-2024-earnings-eps-230147775.html

[19] https://www.businessnewsaustralia.com/articles/technologyone-posts-record–48m-interim-profit-driven-by-big-contract-wins–recurring-revenue-growth.html