Why did the ASX All Technologies Index have such a dire FY22? –

The ASX All Technologies Index (ASX: XTX) fell hard in FY22, dropping by around 35%. That’s a big fall for a whole group of ASX tech shares.

Some of the names in the index include Block Inc (ASX: SQ2), REA Group Limited (ASX: REA), WiseTech Global Ltd (ASX: WTC), Xero Limited (ASX: XRO), Computershare Limited (ASX: CPU), SEEK Limited (ASX: SEK), Carsales.com Ltd (ASX: CAR), NextDC Ltd (ASX: NXT), Pro Medicus Limited (ASX: PME) and Altium Limited (ASX: ALU).

The return of an index is dictated by the performance of the underlying holdings – like Block, REA, WiseTech and so on.

Technology business valuations were running hot near the end of the 2021 calendar year. However, things have certainly come back down with a bump.

It is common for share prices to move up and down in shorter periods. That’s a key function of the share market. Not every buyer and seller is going to want to transact at the same price as last week or last month.

However, the falls we’ve seen since the beginning of 2022 have been savage for some ASX tech shares.

Inflation and interest rates could be key contributors to the volatility and valuation changes we’ve seen this year.

Interest rates

Investing is not always easy. Knowing how much to pay for a business that is growing quickly, or is expected to grow quickly, can be tricky.

For some investors, the interest rate has a major impact on the premium they’re willing to pay on today’s earnings with regard to how large future earnings are expected to be. In other words, the valuation of the ASX All Technologies Index can be significantly influenced by interest rate changes.

I think that Warren Buffett has previously explained this concept very well:

The value of every business, the value of a farm, the value of an apartment house, the value of any economic asset, is 100% sensitive to interest rates because all you are doing in investing is transferring some money to somebody now in exchange for what you expect the stream of money to be, to come in over a period of time, and the higher interest rates are the less that present value is going to be. So every business by its nature… its intrinsic valuation is 100% sensitive to interest rates.

Interest rates are now rapidly climbing higher. The Reserve Bank of Australia (RBA) has increased the interest rate by 100 basis points (or 1.00%) since the beginning of June with two hikes of 50 basis points.

The United States Federal Reserve increased its interest rate by 75 basis points (0.75%) in June. The next increase, whatever size it is, is due soon.

However, the market is largely expecting further interest rate increases over the rest of 2022. So they won’t be a surprise, unlike the scale of the first few increases.

Only time will tell how high central banks have to push interest rates to control inflation. If inflation calms down quicker than expected, that could be beneficial for the ASX All Technologies Index.