Asean tech stocks down but not out: DBS

DESPITE a rocky start to the year, Asean's technology stocks have "ample room" to run, says a DBS Group Research report. Structural trends like 5G, telecommuting and electric vehicles (EVs) bode well for technology, while the region is still in the early days of economic recovery. The research team also remains positive on semiconductor plays, given the recent chip shortage.

In stark contrast to last year, the technology sector has been one of the worst performing sectors year to date (YTD). The healthcare sector has burst out of the gates, with the FTSE ST Health Care Index up 28.6 per cent this year. But the FTSE ST Technology Index is only up 0.1 per cent. It has outperformed only the oil and gas (-2.7 per cent), and real estate investment trust (-2.1 per cent) sector indices.

The divergence started at end-February, in part triggered by rising yields, as well as the shift out of growth to value stocks.

"The US government's US$1.9 trillion package, combined with the path to economic recovery through vaccinations, has sparked reflation fears, resulting in a rapid rise in the US 10-year treasury yields," said the DBS research team in its report on Friday. This, in turn, sparked a sell-off in the technology sector.

"Technology stocks typically perform well in a low interest rate environment and begin to stumble when interest rates rise," it noted. "As many of the technology stocks are high-growth stocks with cash flows mostly weighted in the future, the higher interest rates result in a lower present value and valuation for these companies."

However, they added, value stocks' recent outperformance does not necessarily mean that investors are forsaking growth stocks. Rather, it could reflect a broadening appetite for equities and diversification, amid a low interest rate environment.

"Fixed income yields are likely to stay low even as they rise modestly in a post-pandemic economy recovery," said the team. "Our interest rate strategist's current view is for US 10-year yield to reach 1.75 per cent in 2021 (YTD high 1.6 per cent), while near-term yield is expected to be in the 1.3 - 1.5 per cent range."

Overall, the analysts believe there is still ample room for technology stocks to run. For one thing, the economic recovery is still in a fairly nascent phase. This could work favourably for stocks, as the stock market cycle tends to lead the economic cycle.

"Technology stocks typically outperform in the early stages of the bull market due to the lower interest rate environment, as we had seen last year," they noted. Currently, the analysts believe the stock market cycle is in a "mid bull market" stage of early economic recovery.

Second, structural trends continue to drive technology - like the move to 5G, telecommuting, EVs and autonomous vehicles. These should drive long-term demand for the likes of data centres, server processors, electronics and semiconductor chips.

So far, the indicators are promising. Smartphone sales rebounded to pre-Covid levels in H2 2020, signalling strong end-consumer demand for electronics. Global automotive sales also rebounded strongly in Q4, catching carmakers by surprise and triggering the ongoing chip crunch.

Venture Corp and Nanofilm Technologies are the brokerage's top "buy" picks for their differentiating capabilities in technology, with target prices of S$24.30 and S$6.22 respectively. The research house also favours semiconductor plays including AEM Holdings, UMS Holdings and Frencken Group. These three stock picks have been rated "buy" and given target prices of S$5.36, S$1.57 and S$1.55 respectively.

Across the region, the report also noted that Singapore's technology stocks are the cheapest in terms of price-to-earnings (PE) valuations, compared to its peers. "At merely 12.8 times PE, the current Singapore tech sector is much cheaper than the 28.6 times for Malaysia and 42 times for Thailand."