Keep your eye on the tech champions of the new economy

TECH stocks will not be fading anytime soon, even as the sector has rallied as a result of accelerated digitalisation in the past 2 years.

As the global economy sets out on the path of recovery, albeit at varied paces, investors should continue to keep a close look at tech companies across the board, said DBS' chief investment officer Hou Wey Fook.

"We believe we are still in the early stage of the world transitioning into a digital economy. There remains a long runway ahead for this long-term, irreversible growth trend," he said.

The prospect of the world becoming a digital economy is one that the bank's chief investment office (CIO) is most excited about for the coming year, he said.

In a research note earlier this year, it noted that global retail e-commerce growth is forecast to reach US$6.5 trillion, 22 per cent of global retail sales, by 2023. Business-to-business (B2B) online transactions are expected to increase at a compound annual growth rate of 17.5 per cent, hitting US$20.9 trillion by 2027.

IDEA strategy

BT in your inbox

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign Up

Sign Up

These tech trends are central to DBS' IDEA strategy, which looks at:

• Innovators, which are companies constantly doing things differently to challenge the status quo;
• Disruptors, which create new products and services and displace mainstream leaders;
• Enablers, which facilitate effective digital and technological transformation, and
• Adapters, which transform and adjust their old models to suit ever-changing trends.

In the tech space, Apple could be seen as an innovator, with the introduction of the iPhone over a decade ago creating a whole new era of communication and information access.

E-commerce platforms such as Alibaba may be considered disruptors to physical retail storefronts. The rise of digital wallets has also disrupted banks' traditional way of operating.

Semiconductor companies are an example of enablers that are powering the modern digital economy.

And finally, Disney is one example of an adapter, which has enhanced the offerings of a traditional media conglomerate to include services such as Disney+.

"Valuations should be looked at with respect to the current low interest-rate environment and the new business models of these tech companies. Today, technology companies possess sustainable profitability and strong, free cashflows, while delivering attractive shareholder returns," Hou said.

Tech leaders are in stronger positions today than they were during the Internet bubble. Unlike in the late 1990s, their revenues are now generated on a global basis, with recurring income as part of the revenue mix; they also now have an ability to develop advanced devices and their own intellectual-property patents; and their products and services are highly scalable.

"During the dot-com bubble, many technology companies were making losses with negative cashflow as they were operating on unproven business models. Valuations were highly stretched on a price-to-sales basis back then," Hou said.

"Truly high-performance companies have historically displayed the ability to scale one S-curve before jumping off to the next - and this process repeats itself," he added.

The S-curve charts a growth path where a company goes through phases of first starting operations, undergoing sharp expansion and a period of "hypergrowth", and then peaking off and plateauing, as the market matures. Companies that display a strong historical track record of jumping through multiple financial S-curves through their years of operation would be worth looking out for, Hou said.

IDEA companies would feature heavily in the growth end of the DBS CIO's barbell portfolio strategy, which seeks to balance growth equities for maximum capital gains on one end, with income-generating assets on the other.

The growth end looks at gaining exposure to secular growth trends, including IDEA companies. On the income end, dividend-yielding equities and bonds are preferred as the income nature of these assets provide resilience to the overall portfolio. Hou also recommends gold as a "risk diversifier" and hedge against volatility.

Tech as an ally in wealth management

Internally, DBS continues to look at using technology to better serve its clients and their changing needs, said Steven Ong, head of DBS Treasures.

The conduct of wealth management has changed amid some key industry developments, he said, citing as an instance the emergence of digital exchanges and how investment products have been "commoditised" as more managed products, where portfolios are constructed with pooled investments such as unit trusts and exchange-traded funds as underlying instruments.

"Investors today are expecting to have more information at their fingertips to make decisions - the result of which is that the client base, as a whole, is now more proactive," he said.

The DBS digibank app uses artificial intelligence and machine learning models to push investment-related prompts and alerts - the bank calls them "nudges" - that they predict would be relevant to clients and helps them in making investment decisions. The bank said earlier this month that it would invest S$300 million next year to boost its digital-banking capabilities for its wealth and retail customers.

Part of this will go towards incorporating new prompts, such as personalised alerts for customers when ex-dividend dates for stocks in their portfolio approach, or when companies of interest are due to release their corporate earnings. Forex rates alerts that are currently available to forex traders will also be extended to the bank's remittance service.

Starting next year, similar personalised prompts and insights will also be rolled out on DBS' PayLah! platform, which has over 2 million users.

While technology has catered to clients' growing demand for "smart money on the go", relationship managers are still key in ensuring that services remain client-centric, Ong said.

Part of DBS' investment has thus also gone into Client Connect, which helps frontline staff provide customers with more meaningful and "hyper-personalised" advisory.

For example, if the technology tracks that a customer has been browsing certain types of articles on its website, the platform sends a nudge to his or her relationship manager to follow up on the customer's interests.