Rotation Fatigue: Global Technology poised to regain market leadership
- Three factors will weigh on vaccine-related reflation trades in coming months: (1) Resurgence of CO
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
The information published by DBS Bank Ltd. (company registration no.: 196800306E) (“DBS”) is for information only. It is based on information or opinions obtained from sources believed to be reliable (but which have not been independently verified by DBS, its related companies and affiliates (“DBS Group”)) and to the maximum extent permitted by law, DBS Group does not make any representation or warranty (express or implied) as to its accuracy, completeness, timeliness or correctness for any particular purpose. Opinions and estimates are subject to change without notice. The publication and distribution of the information does not constitute nor does it imply any form of endorsement by DBS Group of any person, entity, services or products described or appearing in the information. Any past performance, projection, forecast or simulation of results is not necessarily indicative of the future or likely performance of any investment or securities. Foreign exchange transactions involve risks. You should note that fluctuations in foreign exchange rates may result in losses. You may wish to seek your own independent financial, tax, or legal advice or make such independent investigations as you consider necessary or appropriate.
The information published is not and does not constitute or form part of any offer, recommendation, invitation or solicitation to subscribe to or to enter into any transaction; nor is it calculated to invite, nor does it permit the making of offers to the public to subscribe to or enter into any transaction in any jurisdiction or country in which such offer, recommendation, invitation or solicitation is not authorised or to any person to whom it is unlawful to make such offer, recommendation, invitation or solicitation or where such offer, recommendation, invitation or solicitation would be contrary to law or regulation or which would subject DBS Group to any registration requirement within such jurisdiction or country, and should not be viewed as such. Without prejudice to the generality of the foregoing, the information, services or products described or appearing in the information are not specifically intended for or specifically targeted at the public in any specific jurisdiction.
The information is the property of DBS and is protected by applicable intellectual property laws. No reproduction, transmission, sale, distribution, publication, broadcast, circulation, modification, dissemination, or commercial exploitation such information in any manner (including electronic, print or other media now known or hereafter developed) is permitted.
DBS Group and its respective directors, officers and/or employees may have positions or other interests in, and may effect transactions in securities mentioned and may also perform or seek to perform broking, investment banking and other banking or financial services to any persons or entities mentioned.
To the maximum extent permitted by law, DBS Group accepts no liability for any losses or damages (including direct, special, indirect, consequential, incidental or loss of profits) of any kind arising from or in connection with any reliance and/or use of the information (including any error, omission or misstatement, negligent or otherwise) or further communication, even if DBS Group has been advised of the possibility thereof.
The information is not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. The information is distributed (a) in Singapore, by DBS Bank Ltd.; (b) in China, by DBS Bank (China) Ltd; (c) in Hong Kong, by DBS Bank (Hong Kong) Limited; (d) in Taiwan, by DBS Bank (Taiwan) Ltd; (e) in Indonesia, by PT DBS Indonesia; and (f) in India, by DBS Bank Ltd, Mumbai Branch.