Ride the secular uptrend in Technology with I.D.E.A.

Our persistent call to favour secular Growth (Technology) over traditional Value including “vaccine winners” continues to pan out
Chief Investment Office06 Aug 2021
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Ride the secular uptrend in Technology with I.D.E.A.

Technology outperformance over “vaccine discovery” proxies panned out as expected amid falling bond yields. In our CIO Perspectives – Rotation Fatigue: Global Technology poised to regain market leadership published on 23 April this year, we advised investors to curb their enthusiasm on vaccine-related rotational in the face of resurging Covid-19 cases and slow vaccine rollouts. We said Technology stocks are poised to regain cyclical leadership as bond yields falter.

Our call has panned out. Since 23 April, the Technology-heavy Nasdaq Index has outperformed US small caps (proxy for vaccine discovery theme) by 8.8 %pts. This has been aided no less by the 38 bps decline in US Treasury (UST) 10Y yield from 1.56% to 1.18%, prompting a rotation to high growth sectors like Technology.

Strong earnings momentum to propel Technology sector higher. We expect the Technology sector to maintain its momentum in the remaining half of 2021. However, the bigger driver this time is corporate earnings as opposed to falling bond yields:

  • At current levels, the UST 10Y yield is substantially below its fair value of 1.6-1.7% and therefore, further pullback is unlikely. But even in the event that the 10Y yield reverts to its fair value in coming months, the up-move will not pose as a headwind for Technology stocks, in our view.
  • In the ongoing US earnings season, Technology registered the highest earnings surprise of 95% while the proportion of Tech companies seeing positive earnings growth is also robust at 97%. These results underline the resilience of the sector despite the pandemic. On a full-year basis, Technology is forecasted to register earnings growth of 46%.

Pick Technology winners using the I.D.E.A. framework. In our CIO Vantage Point – I.D.E.A. published in July 2021, we introduced the I.D.E.A. (an acronym which stands for Innovators, Disruptors, Enablers, and Adapters) framework for picking winners that can successfully navigate global digital disruption.

In a fast-changing world, companies that are deemed as “blue chips” today may possibly turn out to be laggards tomorrow. Therefore, in our stock selection process, we look for companies demonstrating the following traits:

  1. Operating in a Growth industry and is innovative enough to disrupt and gain further market share.
  2. Operating in a mature industry, but the management is forward thinking enough to reinvent itself.
  3. Display strong historical track record of jumping through multiple financial S-Curves through the years of operation.
Figure 1: Strong Technology outperformance over “vaccine winners” proxy

Source: Bloomberg, DBS

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