`Under the Radar' Industry Behind the Best Stocks in Sydney

(Bloomberg) -- The best-performing stocks in Australia aren’t ones the resource-rich country is known for.

Technology companies have been the biggest gainers in the benchmark S&P/ASX 200 Index over the past year, with the sector rising about 29 percent. And that’s after accounting for the global tech selloff sparked Monday by Facebook Inc. Leading the pack Down Under are software maker Altium Ltd., whose market value has nearly tripled to A$2.9 billion ($2.3 billion), while New Zealand crossover Xero Ltd. and WiseTech Global Ltd. have almost doubled to A$4.8 billion and A$3.1 billion respectively.

Investors are rewarding one of Australia’s fastest-growing industries, with profits for tech firms forecast to increase 38 percent this year. That’s outpacing the nation’s largest sectors -- earnings at the nation’s scandal-plagued banks are projected to expand 9 percent while its mining industry, reliant on commodity prices, is expected to grow 31 percent.

“Banking’s struggling, mining’s been up and down,” said Guy Carson, head of Australian equity strategy at Tamim Asset Management in Sydney. The likes of Altium and WiseTech are “flying under the radar because these companies from the tech sector here, relative to the banking and resources sector, are very small companies.”

Miner BHP Billiton Ltd., Australia’s biggest company with a market value of A$149 billion, is worth more than three times as much as the entire S&P/ASX 200 Information Technology Index. The sub-index represents just 2 percent of the benchmark, while financials cover about 36 percent, followed by materials at 18 percent.

The weighting also highlights a contrast with the U.S., where technology stocks, led by Apple Inc., have grown to represent a quarter of the S&P 500. But the Australian industry is growing faster for now.

‘Global Story’

“This is a global story,” Julia Lee, equity strategist at Bell Direct Pty. in Sydney, said about technology stocks. Australian investors are eyeing the sector’s success in the U.S. and around the world, and are trying to replicate it at home, she said. Perhaps the best-known Australian tech company is Atlassian Corp. but its shares trade in New York, not Sydney.

Of the 12 tech stocks on the ASX 200, just three are in the red over the past year. As a group they were little changed on the day at 12:44 p.m. local time. However, some have become too expensive, Lee said. The Australian companies command a valuation of about 25 times forward earnings while their American peers trade at about 19 times.

Blowups

That makes the margin of error thin. WiseTech shares sank 23 percent in one session last month because investors were disappointed the logistics software maker didn’t raise earnings projections. Other high-profile blowups have come from GetSwift Ltd. and Big Un Ltd., two stocks that aren’t in the benchmark.

Tamim’s Carson has been reducing holdings of stocks like Altium because he thinks they’ve become too expensive. Still, he’s not soured on the industry, which represents 28 percent of his A$25 million portfolio.

“We’re conscious that some stocks have probably run too hard and may have a pullback, but some of the smaller names we still think have plenty of upside,” Carson said, pointing at the likes of utility software provider Gentrack Ltd., whose shares have climbed 82 percent in the last 12 months. “Technology is just going to become more and more important.”

To contact the reporter on this story: Jackie Edwards in Sydney at jedwards160@bloomberg.net.

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Vivek Shankar, Cormac Mullen

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