Source: Bell Direct

There’s no denying that the tech rally over the last 12 months has challenged historical trends where the high-growth tech sector is sold off during times of high interest rates. 

Historically, in a high interest-rate environment, tech stocks and A-Real Estate Investment Trusts (A-REITs) are usually among the first investments to be sold due to the high cost of paying off debts required for growth. 

But in 2023-2024, the tech rally surprised markets globally with the Nasdaq Composite Index soaring to record highs. The ASX 200 tech sector was up 30% over 12 months to end-June 2024. 

Bell Direct’s view is that one of the key drivers of the tech boom is the artificial intelligence (AI) movement. More investors have bought AI-related tech shares during one of the largest tech revolutions in history. Nvidia, a US-listed tech company, has risen to become the most valuable publicly listed company in the world. 

Conversely, the turbulence among energy stocks has seen high volatility within the sector over the past 12 months, primarily driven by geopolitical tensions and the aftermath of the Russia-driven energy crisis. 

In contrast, uranium miners have experienced a sharp rise over the year as an increasing number of countries shift their energy outlook to nuclear power as part of the green energy transition. 

Oil producers, though, have been on a rollercoaster of geopolitical tension-driven spikes and troughs with the price of the commodity soaring as high as US$93/barrel and tumbling to as low as US$71/barrel. 

While OPEC+ took measures to stabilise the oil price, Middle East tensions continue to dominate movements in spot oil prices. 
 

5-year sector performance 

The key event of the 5-year chart below is the sharp dip in all sectors aside from healthcare at the end of 2019. 

Source: Market Index

The spread of the global COVID-19 pandemic saw investors and traders sell equities, as a new normal of life during lockdown emerged. 

With nations plunged into lockdowns, government stimulus packages were announced, meaning government payments for many Australians. Bell Direct saw an influx of retail traders start buying shares. 

A Bloomberg Intelligence study showed retail investors accounted for 19.5% of all stock market shares traded in the first six months of 2020. Thus, the trends seen over the last five years are historically uncharacteristic. 

The tech sector was the ‘it’ sector for newcomers to share investing in 2020. The sector has rebounded to lead market gains over five years, as indicated in the chart above (charcoal-coloured line). 

In Bell Direct’s view, the pull-back in the tech rally in 2021-2023 was largely due to the rising interest-rate environment, the rising number of dormant traders in the market, and easing earnings growth in the tech sector. 

Fast forward to 2023 and the tech sector was rallying again thanks to interest in AI. How high will the AI rally go? That is the million-dollar question every investor is asking, as Nvidia shares have soared to a record high in recent times. 

Materials stocks have also posted a strong performance over the last five years with steady growth after the pandemic sell-off. This is another interesting trend as demand for iron ore has been declining out of China since the pandemic began, due to the slower economic growth in the world’s second-largest economy. 

Gold miners have done much of the heavy lifting for the materials sector, especially in the last 12 months, as the price of the precious commodity has rallied. 

Bell Direct believes the key drivers of the gold rally include demand outweighing supply, inflation concerns, rising interest rates, a weaker US dollar, rising geopolitical tensions and investors buying into safe-haven assets during the widespread market uncertainty.
 

10-year sector performance 

Source: Market Index

Over the last 10 years, healthcare has outperformed the broader Australian sharemarket. Bell Direct considers that this is due to high government and private health insurer spending in the sector. 

In Bell Direct’s view, these two key drivers, paired with the earnings potential for healthcare companies that achieve commercialisation of a drug or treatment, have underpinned the healthcare sector’s outperformance over 10 years.

The healthcare sector was the only sector to rise in the early COVID-19 pandemic era, as investors opted for secure returns from healthcare providers that halted current trials to develop and sell vaccines or complementary pandemic-related products like masks and antibacterial agents. 

In Bell Direct’s view, the dip in the healthcare sector post-pandemic was unsurprising as healthcare companies shifted back to their pre-pandemic clinical trials, which saw money spent on trials instead of coming in through pandemic-product sales.

When investing in the healthcare sector, Bell Direct sees a trend of investors either buying into the early stages of pre-clinical trials or at the commercialisation phase as the company progresses through lengthy clinical trials and receives the required regulatory approvals to hit the market. 

Investors should take care when assessing the healthcare sector, as sector ‘heavyweights’ can drive performance. Although it may look like a broad healthcare rally or sell-off on any given day, it could be driven by one heavyweight stock like Australian biopharmaceuticals giant CSL (ASX: CSL) which accounts for 55.6% of the ASX 200 Healthcare sector, according to Bell Direct analysis.

A sector some investors may be surprised to see outperform the key index over 10 years is consumer discretionary (the orange line in chart above).

While government payments stimulated consumer spending in the COVID-19 and post-pandemic era, rising interest rates generally lead to cost-of-living pressures. Consumer discretionary spend is traditionally reduced when household budgets come under pressure.

Despite the high interest-rate environment, consumer retail spending in Australia has continued to rise since August 2022, albeit in a declining growth trend. 

In Bell Direct’s view, within retail, there have been shifts from the popularity of furniture retailers in the early pandemic years to the resilience of niche fashion retailers targeting younger generations. 

As shown the 10-year chart from Market Index above, some key sectors that appear to be outperforming in recent times have significantly underperformed the ASX 200 over the last 10 years, including financials and energy stocks. However, investors should be aware that this is not a guide to future performance.