The Zip Co Ltd (ASX: Z1P) share price is down around 3%. Other ASX tech stocks are down over 1% such as the Afterpay Ltd (ASX: APT) share price, Xero Limited (ASX: XRO) and Nuix Ltd (ASX: NXL). Nuix is actually down over 5%.
What’s happening to ASX tech shares?
There is currently a broad sell off of the ASX. The S&P/ASX 200 (ASX: XJO) itself is down 0.7% at the time of writing, but it was down even further earlier.
Overnight there were some heavy painful declines, particularly with US tech stocks. The NASDAQ Composite (IXIC) fell by 2.7%, with Microsoft, Alphabet, Apple and Amazon all falling by between 2% to 3%.
There is a worry from investors that economies are growing faster than expected and that there could be inflation in various areas due to a number of reasons. COVID-19 has caused a lot of disruption to both supply and demand.
If there’s higher inflation then, theoretically, central banks are meant to increase their interest rate to try to dampen the situation so that price growth returns to a more sustainable level.
What does this have to do with shares?
There are a number of different factors that affect the value of shares. Business performance is obviously a key one. If a business keeps doing well then its share price is likely to rise. If the business isn’t doing well then the share price will fall.
But interest rates are an important factor too for valuations. If interest rates go up, then that is theoretically meant to reduce asset prices today because investors can get a higher risk-free rate of return from other places. This particularly affects high growth rate companies because the value you put on the business in the future, and discounted back to today, is affected by the ‘discount rate’ you use.
Is this an opportunity?
I think any time the market sells off is a good opportunity to think about shares because we can buy good businesses at lower prices. Of the ASX tech shares I’ve mentioned, Xero would be the one I’m most interested in because I think it’s a very high quality tech company. I also think an e-commerce business called Redbubble Ltd (ASX: RBL) could be pretty interesting for the long term at a share price of $5.30. But there could be more volatility ahead.