Tech stocks will continue to rally during second half: DBS CIO

Although the S&P 500 index has rallied almost 15 per cent in 2023, most of the upside has been from technology stocks. Tech plays within this broad-based index have climbed over 36 per cent, and the top five tech stocks by market capital – Apple, Microsoft, Alphabet, Amazon and Nvidia – are collectively up a whopping 69 per cent.

“The message is clear. US equities have been lacklustre and the only segment performing well is US technology,” observed the DBS Chief Investment Office in the bank’s latest report, DBS CIO Insights for the third quarter of 2023. Released this week, the report was prepared by DBS chief investment officer Hou Wey Fook and his team.

Going by the report, Mr Hou and his team are neutral on the overall market and overweight on technology, and expect this divergence in performance to intensify. The upward momentum for technology-related plays will be propelled by bond yields and the Federal Reserve’s (potentially dovish) trajectory. Meanwhile, non-tech plays will be weighed down by margin pressures and recession concerns.

The report recommended that investors stay overweight on growth plays and seek opportunities in quality emerging-market bonds.

It also saw the Fed pausing its monetary tightening, after two more interest rate hikes this year. But it also said that the yield-curve inversion (where the yield on short-term notes is higher than long-term notes) portends a potential recession.

It noted that the performance of risk assets following previous pauses has been a mixed bag.

“Since 1990, there have been four occasions where the Fed paused its monetary tightening cycle,” the DBS CIO Insights report said. “The subsequent 12-month performance for risk assets was generally positive, with equities and bonds gaining 16.8 per cent and 7 per cent respectively while multi-asset portfolios consisting of 50 per cent equities and 50 per cent bonds were up 11.9 per cent.”

But the state of the yield curve played a part in the rate of returns.

When the yield curve was not inverted, equities and bonds registered average gains of 30.1 per cent and 9.9 per cent respectively, while multi-asset portfolios were up 20 per cent. When the yield curve was inverted, as it is now, the average gains for equities and bonds became more modest at 3.4 per cent and 4.2 per cent respectively, while multi-asset portfolios were similarly low at 3.8 per cent.

The bank recommended that investors go long duration on equities with quality overlay. This includes high-growth technology-related plays, which will likely see stronger upside momentum ahead.

“Typically growth-orientated and not value-orientated equities demonstrate long-duration characteristics,” it added. DBS reckons investors should also seek opportunities in Asia, including Japan.

But the report was negative on US commercial real estate, which was seen as vulnerable to rising vacancy rates and bond yields. On the other hand, the report saw opportunities in private-asset markets.

Investors can also diversify and hedge against market volatility with exposure to gold, it added.

Gold has rallied 6.5 per cent this year, and many central banks have been diversifying away from the US dollar by buying gold. Reports suggest some of the biggest purchasers of gold this year have been Singapore, India, China and Turkey.

All in all, the report saw the second half as a challenging time for markets. But there are opportunities in technology stocks, quality emerging market short-duration bonds and private-market investments. The uncertain macroeconomic environment will also prompt a flight to quality, especially to large banks and US Big Tech.