Despite the technology sector being one of the worst performing sectors year-to-date (y-t-d), the team of analysts at DBS Group Research, Ling Lee Keng, Chung Wei Le, Toh Woo Kim and Phanthila Tharachatr view tailwinds remaining strong for the sector.

In a report dated March 19, the team writes that there is “ample room” for technology stocks to run as “we are still in the early days of economic recovery”.

“The stock market cycle is forward looking and tends to lead the economic cycle. Technology stocks typically outperform in the early stages of the bull market due to the lower interest rate environment, as we had seen last year,” it adds.

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Furthermore, the team sees the recent structural trends driving technology. These include 5G enabling new technological applications while new generations of mobile networks are driving smartphone sales and semiconductor shipments.

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“More advanced semiconductor chips are required to drive vehicles, especially with the rising popularity of electric vehicles and autonomous driving,” says the team.

The recent chip shortage should also be seen as a positive development for counters in the sector as it re-emphasises the importance of semiconductor chips and “our vision of a secular uptrend”.

Though the FTSE Technology Index has underperformed the Straits Times Index (STI) y-t-d – which saw a divergence at end-February due to rising yields and the shift to value stocks – the analysts say the outperformance of value stocks does not necessarily mean that investors are forsaking growth stocks.

To them, this represents “a broadening appetite for equities and diversification when

fixed income yields are likely to stay low even as they rise modestly in a post-pandemic economic recovery”.

“Our interest rate strategist’s current view is for US 10-year yield to reach 1.75% in 2021 (y-t-d high 1.6%), while near-term yield is expected to be in the 1.3-1.5% range,” writes the team.

To add, the team says Singapore tech is the cheapest in the Asean region.

“At merely 12.8 times price-to-earnings (P/E), the current Singapore tech sector is much cheaper than the 28.6 times for Malaysia and 42 times for Thailand,” it writes.

Amongst the Singapore counters, the team likes Venture Corporation (VMS) and Nanofilm Technologies “for their differentiating capabilities in technologies”.

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The brokerage has given VMS and Nanofilm “buy” recommendations with target prices of $24.30 and $6.22 respectively.

Semiconductor stock picks are: AEM Holdings, UMS Holdings and Frencken with “buy” calls and target prices of $5.36, $1.57 and $1.55 respectively.

As at 4.48pm, shares in VMS and Nanofilm are trading at $19.88 and $4.97 respectively, while shares in AEM, UMS and Frencken are trading at $3.91, $1.26 and $1.45.