Digital economy the top-performing equity exposure in Q3: iFast

DIGITAL economy exposure was the top-performing equity exposure across Fundsupermart's available funds in the third quarter of 2020, said iFast in a research note.

Just like the previous quarter, digital economy stocks - as gauged by the O'Shares Global Internet Giants exchange-traded fund (ETF) - extended its outperformance.

To be sure, it had been hit hard in early-September 2020 on the back of a resurgence in volatility generated by the options market. But losses were quickly pared later in the same month, iFast said. The fund gained 14 per cent in Q3 in Singdollar terms, and is up some 77 per cent since the start of the year. The ETF's top holdings include Amazon, Alibaba, Tencent, Alphabet, Facebook, Meituan and Pinduoduo.

Overall, tech investments continue to outperform, with the MSCI World IT Index up 12.4 per cent in Q3.

The digital economy remains "firmly underpinned" by several megatrends such as rising Internet adoption and digital disruption, the iFast report said.

These factors are key in bolstering the improvement of fundamentals for the digital economy companies, which eventually drives the sector's return. Over recent years, there has been a sustained pickup in revenue, earnings and increased cashflow for many of these companies as well.

GET BT IN YOUR INBOX DAILY

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

Sign UpVIEW ALL

"The pandemic has turned out to be a surprise catalyst which has accelerated these megatrends via a global wave of work-from-home and related measures. Until a vaccine is found and distributed, these global safety measures should remain supportive of digital economy stocks," the report said.

iFast noted the concern from investors on elevated valuations for digital economy stocks, but said there are several pillars of support for the higher valuations of these digital economy companies.

These include strong and improving fundamentals, the low-rates environment that supports valuation, as well as their status as Covid-19 winners. "These factors may mitigate a big drawdown from de-rating and support continued flows into the digital economy sector."

Other top performing markets were South Korea and India, which advanced 11.4 per cent and 10.2 per cent respectively in Singapore dollar terms, according to the report.

By geography, Asian equity markets performed relatively better than other regions in the third quarter of 2020, particularly those with better Covid-19 management and higher concentration of technology sector, iFast said.

In contrast, bottom performers were markets which were most susceptible to risk-off sentiments, which were largely triggered by the resurgence in geopolitical tensions and rising Covid-19 cases in the quarter, the research team noted. Poor performers included Thailand (down 11 per cent), Brazil (declined 5.6 per cent), Indonesia (decreased 5.1 per cent), Hong Kong (fell 4.7 per cent) and Singapore (dropped 3.5 per cent).

On aggregate, global equities performed well in July and much of August 2020. However, concerns regarding the virus, climbing valuation multiples and sporadic episodes of US-China tension, began to soften risk sentiments in the later part of Q3, iFast said.

iFast's research team is positive that Q3 top performers alongside Asia and China - backed by strong secular growth drivers - will be able to maintain their lead against global peers for the rest of 2020.