Rotation Fatigue: Global Technology poised to regain market leadership


Three factors will weigh on vaccine-related reflation trades in coming months: (1) Resurgence of COVID-19 cases; (2) Peakish macro momentum; and (3) Retracing UST yields.
Chief Investment Office23 Apr 2021
  • Three factors will weigh on vaccine-related reflation trades in coming months: (1) Resurgence of CO
Photo credit: AFP Photo


Too fast too furious? Time to curb your enthusiasm on vaccine-related rotational trades. Back in August 2020, we have in our CIO Perspectives – Pandemic Fatigue: Time to position portfolios for vaccine discovery (24 August 2020) advised investors to embrace some optimism on the likelihood of vaccine discovery which benefits traditional industries requiring face-to-face interactions (the domestic plays).

Our timing proved prescient.

As Figure 1 shows, the outperformance of Technology-heavy Nasdaq Composite Index over US small caps (our proxy for domestic plays) peaked on 26 August 2020. Since then, it has undergone sharp relative underperformance as global portfolio allocators jumped onto the bandwagon of piling into domestic plays in anticipation of vaccine discovery.

However, this rotational switch is showing signs of fatigue.

Since 12 March, the Nasdaq has outperformed US small caps by 8.9 %pts and this, in our view, reflects rising moderation in enthusiasm for vaccine-related “reflation trade”; and the rationale are:

1)      Resurgence of COVID-19 cases and slow vaccine rollout: COVID-19 cases are rising while vaccination among developing countries remain slow. A delay in the return to normalcy for businesses will weigh on global growth.

2)      Peakish macro momentum: At 64.7, the US ISM Manufacturing Index is looking toppish and a retracement in the index has historically coincided with a moderation in the rally on S&P 500 Index.

3)      Retracing UST yields: US Treasury (UST) bond yields are retracing despite strong macro data. This suggests rising caution on this year’s economic growth assumptions.

Technology to regain cyclical leadership as growth moderates and bond yields retrace; Gold looking good. The relative underperformance of Technology is turning the corner and we expect the positive momentum to continue. The virtual and borderless nature of the technology space requires less face-to-face human interactions. A deterioration of the COVID-19 situation will therefore have less negative impact on Technology and we expect the sector to regain cyclical leadership.

The retracement in bond yields, meanwhile, is positive for the outlook of gold and it is time to have a relook of the precious metal.

Figure 1: Technology to outperform as enthusiasm for vaccine-trades falter
 


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