Charts and caffeine: Citi's two favourite ASX tech stocks

Charts and Caffeine

Livewire Markets

Welcome to Charts and Caffeine - Livewire's pre-market open news and analysis wrap. We'll get you across the overnight session and share our best insights to get you better set for the investing day ahead.

MARKETS WRAP

Note: US markets closed overnight. They will come back online tonight.

  • FTSE 100 - 7,233 (+0.89%)
  • GERMAN DAX - 12,773 (-0.31%)
  • BRENT CRUDE - US$113.83/bbl
  • GOLD - US$1805/oz
  • NATURAL GAS - US$5.86/MMBtu

Also note, no major data overnight.

RBA PREVIEW

Ah yes. It's Reserve Bank meeting time. The first Tuesday of every month at 2:30pm always brings a smile to economists' faces (and probably some nail-biting to the rest of Australia.)

All things considered, the Reserve Bank is likely to hike interest rates by 50 basis points again - the first time consecutive 50 basis point hikes have ever been handed down at Martin Place. After all, the central bank has to reconcile the end of a strong consumer with soaring inflation, supply-side problems (of which it cannot control), and a national minimum wage that just got hiked to keep up with the cost of living. 

The only place where rate hikes are yet to have material impacts across the board is housing - where the cold data suggests we haven't seen a big hit to housing finance yet.

It’s too early to see the impact of the RBA’s first rate hike since 2010 in these May numbers. But higher rates will eventually bite and drive housing finance and building approvals lower, says ANZ Research.

For the record, 25 of the 26 economists polled by Bloomberg expect a 50 basis point rate hike today. But I l like the way Scott Solomon at T. Rowe Price sums things up:

It is most likely that the RBA hikes interest rate by 50 basis points, but I would not be surprised to see them bring the cash rate to 1.5% by hiking 65bps.

I also like the words of Prashant Newnaha at TD Securities - who gives an optimistic view (if we can call it that) for those who hold equities and other risk assets:

We see a low likelihood of the RBA sounding more hawkish in the statement after the Governor's successful attempt in paring back aggressive OIS pricing.

Hawkish = bad for equities; Dovish = good for equities

THE CHART

I continue to bang on about this for a reason - it really does matter. Chris Watling told me exclusively last month that he won't make a definite case for a recession until corporate balance sheets react. As Macrobond Financial writes, business confidence also takes a hit when earnings are revised down. This chart shows the extent of that correlation. Given the current plunge in expected earnings – towards levels last seen at the start of the pandemic, you could argue a huge drop in business confidence could be coming in the next few months.

READER REQUEST

It's time for the first of our reader requests! Nathan Kandiah wrote in asking for a chart tracking the VIX (volatility index) against other major equity indices (e.g. the S&P 500). 

Well - ask and you shall receive Nathan! A five-year chart of exactly what you asked for (I've also thrown in the NASDAQ for additional context). Thanks for writing in!

Stay invested ... or at least, enjoy the rollercoaster.

STOCKS TO WATCH

Speaking of volatility, let's chat about all things tech. As if you didn't know by now, big tech companies (here and abroad) have had it rough so far this year. On the plus side, multiples are now trading well below pre-COVID levels. 

And as this chart shows, it's actually trading in line with the 15-year average.

Buy the dip? (Source: Citi)

Citi's Australian tech analyst Siraj Ahmed says that "while valuation and cost pressures have been the key focus to date, we see potential risks in the near-term from rebasing of revenue growth expectations." 

Indeed, no tech company (or any company for that matter) is immune to the slowing macro environment. 

But, as is the case for every business, the question is demand. If businesses will continue to need your product, can charge a significant price for the service, and has strong exposure to different regions and consumer tastes, chances are you'll get a more favourable rating from the analysts.

That explains why NextDC (ASX:NXT) and Wisetech (ASX:WTC) are considered the top picks at the broker. In contrast, Zip (ASX:ZIP), Appen (ASX:APX), and Fineos (ASX:FCL) rate at the other end of the scale. 

*Note 1: Ironically, Fineos is an outperform at Macquarie following competitor Duck Creek's most recent announcement that new deal closure has been pushed out. How ironic. 

*Note 2: Tech investor confidence is at lows not seen since the Global Financial Crisis, perhaps further adding to Siraj's point. When fear is so great and the losses have been so deep, there's bound to be someone who will nibble at the dip.

Crikey.

THE QUOTE

We are about to witness an avalanche of earnings downgrades. The U.S economy is heading into a recession in the next 12 months. In fact stagflation is now my base case for the U.S, Canada, Europe, and that includes the U.K, which is stagflation central, Australia and New Zealand.

The U.S central bank kept rates way too low for way too long and now they will raise rates aggressively as the economy enters a recession. They will compound their first mistake with a second one. There is a word in the English language for this kind of conduct.

Veteran investor Jonathan Pain had this to say about the risk of a recession in the United States this coming year. He absolutely did not mince his words - or muck around for that matter.

GET THE WRAP

We're trying something new around here - a daily market preview with an intelligent twist. If you've enjoyed this edition, hit follow on my profile to know when I post new content and click the like button so we know what you enjoy reading.

If you have a chart and/or a stat that you would like to see featured in a future edition of the newsletter, drop us a note at content@livewiremarkets.com.

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Charts and Caffeine
Markets Wrap
Livewire Markets

Charts and Caffeine is Livewire's daily pre-market news and analysis wrap. Every day, Livewire's team of market journalists and editors get you across the overnight session and share their best insights to get you better set for the investing day...

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