Reported by The Edge Singapore

Felicia Tan Published on Thu, Jun 10, 2021 

Companies that have enjoyed strong earnings growth so far – especially those in the high-growth technology sector – should continue to benefit from the global digitalisation trend, says OCBC Investment Research (OIR) analyst Carmen Lee in an equity research report on June 7.

In her outlook for the rest of 2021, Lee called the first five months of 2021 “volatile but good” and that the global economy recovery is underway, with the trend likely to stay positive for the next one to two years, she writes.

While Covid-19 has been around for over a year at this point, Lee says the pandemic is unlikely to end anytime soon.

That said, Lee says the short-term impact is likely to be “minimal” for now unless the lockdowns persist.

Despite the ongoing pandemic, Lee sees optimism in value and cyclical stocks amongst investors amid the roll-out of vaccination programmes and the gradual opening of some economies around the world.

“Since the start of the year, there has been a clear rotation from growth stocks into cyclical and value stocks. This has benefited companies which were largely neglected or affected by the pandemic in 2020, including energy, financial, property and industrial sectors,” she writes.

“Growth companies, which were the stars in 2020, were able to still grow despite the pandemic and this included many of the e-commerce, internet, online, data, software and hardware and bio-tech companies,” she adds.

The high-flying growth sectors in 2020 have underperformed this year, according to the MSCI World Growth Index that’s up 6.4% year-to-date (y-t-d) compared to the 32.7% gain in 2020. On the other hand, the MSCI World Value Index outperformed with gains of 16.4% y-t-d compared to the 3.6% decline in 2020.

“The strong rotation into value stocks is largely supported by expectation of flow-through improvement from a global economic recovery in 2021,” says Lee.

That said, the long-term trend for growth companies remains positive.

“Innovation will be a key driver to ensure that companies are able to differentiate, grow and offer products and services that will meet changing needs. The world is now experiencing the start of the innovation super-cycle. This encompasses AI, big data, cloud, 5G, IoT, communications, etc. These key trends should continue to dominate in the coming decade,” she adds.

With the anticipation of a global economy recovery, Lee says she believes that value stocks will still have some upside albeit at a slower rate since some of the key positives have already been priced in.

Year-to-date, the benchmark Straits Times Index (STI) shed 2.7% from its 52-week high in April, which outperformed most regional markets.

In comparison, the Taiwan Stock Exchange fell 3.2% from its 52-week high in April, while the China Securities Index (CSI 300) dropped 10.9% from its 52-week high in February.

In the US, the New York Stock Exchange (NYSE) FANG+ Index shed 9.2% from its 52-week high in February.

“This was largely due to the switch out of selective high-growth companies. Funds went into value and cyclical stocks, positioning for companies that will potentially benefit from the re-opening of economies,” says Lee.

Looking ahead, Lee sees digitalisation being a key driver in the Singapore economy, with the Singapore government’s plans to transform the republic into a leading smart nation, and the accelerated adoption and use of e-commerce brought about by the Covid-19 pandemic.

“Digitalisation is also seen among financial, telecommunications, property, REIT and Healthcare companies. Driven by these strategic plans to transform and digitalise the Singapore economy and companies, we believe the long-term growth story for Singapore is intact,” she says.

The Straits Times Index, as at June 7, was trading at a price-to-earnings ratio (P/E) of 12.8 times FY2021 earnings and 11.6 times FY2022 earnings, according to OCBC’s estimates.

The STI was trading at 1.0 times FY2021 book, which is below the 10-year historical average.

Valuations are currently inexpensive, she adds.

To Lee, the current correction for high-growth stocks means investors can now buy into previously expensive valuation high-growth counters to hold for the medium to long term.

“Innovation-focused companies are likely to continue to generate value and perform well. In the meantime, the current focus on value ideas is likely to also continue as companies ride the economic recovery in the coming quarters,” she says.

For investors looking to invest long-term, Lee sees value in “choosing a stock pick strategy and advocating a balanced portfolio of banking, property, REIT, technology and industrial stocks”.

“Some of our buy-rated stocks include Ascendas REIT, Ascott Residence Trust, CapitaLand Integrated Commercial Trust, CapitaLand, City Developments, DBS Group Holdings, Frasers Centrepoint Trust, Frasers Logistics & Commercial Trust, Keppel DC REIT, NetLink NBN Trust, SATS, Singapore Telecommunications, United Overseas Bank, UOL Group and Venture Corp.”