Can the technology sector sustain its fine run?

THE new buzzword for 2017 wasn’t dividend yielding stocks – rather it was technology and semiconductor stocks.

In the US, the share price of tech giants such as Apple, Facebook, Alibaba, Alphabet and Symantec among others, charged forward, but it wasn’t all froth as they were supported by better earnings and growth prospects.

Hence unlike the dotcom bubble in 2000, technology stocks aren’t overvalued and hedge fund managers have been openly increasingly their portfolio weightage in the tech sector.

The S&P 500 Information Technology Sector has gained nearly 23.83% since January, making it one the best performing sectors on a year to date period. By comparison, the Nasdaq and the Dow Jones Industrial Average have gained 17.87% and 11.45% respectively, year to date.

Analysts say that amid a record high Dow and uncertain policies from the Trump administration, investors have been increasingly turning to Internet and technology companies, as these companies are less sensitive to tax cuts or interest rate hikes.

Furthermore, they could be beneficiaries from deregulation moves and lower corporate taxes, particularly for companies that have cash overseass.

In Malaysia, the technology indice has done similarly well. On a year-to-date basis, it is up almost 70% at the indice’s Thursday close.

The outperformers of the tech indice include investor favourites such as Notion VTEC Bhd, Cuscapi Bhd, Dataprep Holdings Bhd, Excel Force MSC Bhd and Inari Amertron Bhd.

Notion Vtec’s share price has been on a roll over the last one year. It is up nearly 200% on a one- year basis, and more than doubled on a year-to-date basis at its current price of RM1.20.

Analysts have initiated coverage on the stock as it embarked on its expansion spree. This manufacturer of precision parts for hard disk drives (HDDs), the automotive industry and cameras is piggybacking on the jump in demand for automotive electronic brake system components.

Meanwhile, the launch of the Digital Free Trade Zone in Malaysia, where Alibaba’s Jack Ma will have a presence, also gave tech stocks more weightage. Using big numbers and the China factor, stocks like Cuscapi and Dataprep saw huge price swings although nothing much had happened in reality.

“This isn’t a bubble. The share price of the tech stocks are backed up by earnings and increased orders,” said one fund manager who continues to like Inari Amertron.

He likes Inari’s strategic positioning within the semiconductor value chain. This has further been reflected in Inari’s most recent earnings report, where most of the grop’s core business segments recorded better earnings.

Thus do these stocks still have legs to run?

“I think as long as they deliver on their earnings, the stocks can continue to appreciate. It is not just the tech stocks, but most stocks are already expensive. The difference between those stocks whose share price sustain, are those that can continue to deliver on its earnings,” said the fund manager.

MIDF Investment Research analyst Martin Foo Chuan Loong maintains his “positve” call on the sector on the back of a few reasons.

Firstly, the global semiconductor sales growth momentum was maintained at more than 20% year on year in June 2017. Secondly, the sales growth in the Americas market was particularly robust at a 33% rate.

He says strong June 2017 sales figure serves as a strong indication of healthy numbers in the coming months. Spending on semiconductor equipments also remained encouraging in June.

Foo says that apart from the smart devices segment, he also expects healthier demand from the automotive, storage and healthcare markets. The automotive market will driven by the continuous effort to increase the average semiconductor content per vehicle.

“Demand from this market is also less susceptible to seasonality factors, thus providing a steadier stream of revenue. Meanwhile, higher demand for the storage market would be supported by the cloud computing and data centre industries,” he says.

In a Seeking Alpha article, one interesting correlation between tech stocks and interest rates was pointed out.

The article said that there was a lesser known intermarket relationship, and that was the inverse link between bond yields and technology stocks’ relative performance.