Ahead of the announcements of several Covid-19 vaccines in November last year, DBS Bank had made the call to investors to position for a recovery play. The timing of the move, as it turned out, had proven to be “prescient”, DBS chief investment officer Hou Wey Fook and strategist Dylan Cheang write in a note dated April 23.
But now, the bank is advising investors to rotate back to pandemic-proof assets, particularly technology stocks and gold. The switch to a recovery play in anticipation of vaccine discoveries, it says, is showing signs of “fatigue”.
According to DBS, the technology-heavy Nasdaq Composite Index over US small caps had peaked on Aug 26 last year. The index had subsequently undergone a sharp relative underperformance as global portfolio allocators jumped onto the bandwagon of piling into domestic plays in anticipation of vaccine discovery.
However, since March 12, the Nasdaq has outperformed US small caps by 8.9 percentage points, DBS says in its recent report. The bank says the recent outperformance reflects “rising moderation” in enthusiasm for vaccine-related “reflation trade”. It sees three reasons for that.
For one, the number of new Covid-19 cases has spiked recently. India, notably, has seen a second wave of infections, hitting a new high for the number of cases recorded daily. The slow vaccine rollout there has only made things worse.
“Covid-19 cases are rising while vaccination among developing countries remains slow. A delay in the return to normalcy for businesses will weigh on global growth,” say Hou and Cheang.
The momentum in positive macro data is also approaching a peak, according to the bank. At 64.7, the US ISM Manufacturing Index is looking “toppish”, it says. In fact, a retracement in the index has historically coincided with a moderation in the rally on S&P 500 Index, it adds.
Thirdly, the US Treasury (UST) bond yields are retracing despite strong macro data. This suggests rising caution on the economic growth assumptions in 2021, says DBS.
“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 interaction. A deterioration of the Covid-19 situation will therefore have less negative impact on technology and we expect the sector to regain cyclical leadership,” say Hou and Cheang.
The change in stance means that DBS has retreated from its previous recommendations. In its previous report on Aug 24 last year, DBS noted that the fatality rate had started to trend lower. By the second half of last year, it was widely accepted that the virus was becoming less fatal, the bank said. The lower fatalities meant the likelihood of another economic lockdown was lower, it added. In addition, the unprecedented quantitative easing by central banks around the world had put a floor to risk assets.
Against that backdrop, the bank had previously favoured the hotel and leisure industries, which were hit hard during the pandemic as safe distancing rules kicked in. It said that both industries were poised for a “robust” rebound. After all, global tourism is a long-term secular trend and it is only a matter of time before people start travelling again, it reasoned.
DBS had also favoured athleisure — which is an investment theme synonymous with rising millennial consumption. The bank said the trend was poised to regain its footing again after a brief interruption by the pandemic. It believed that athleisure companies would recapture the level of outperformance seen during the period from June 2019 to January 2020.
The bank, however, has not made clear whether it continues to disfavour airlines. DBS previously said it saw more “structural pains” for airlines ahead. The bank pointed out that Covid-19 had underlined the effectiveness of online meetings, which will invariably reduce the need for business travels. Even if business travel should resume, the demand for business class seats will stay muted given lacklustre business conditions, it reasoned.