Boom in manufacturing giving IT stocks an attractive boost

Mention tech companies and a few names come to mind - Apple, Facebook and Google.

The explosive growth of these firms - and their stocks - make them an attractive option for investors, especially millennials.

These tech giants are not listed on the Singapore Exchange (SGX), but there are still options for investors keen on the information technology (IT) sector.

After all, one in 10 of all stocks listed on the SGX represent the IT sector, which was the best performing sector of the past quarter - with a total return of 25.5 per cent - noted an SGX report this month.

Last month, the sector generated a capitalisation weighted 10.9 per cent in total return.

The majority of IT companies listed on the SGX focus on technology hardware manufacturing.

Despite the uncertain economy, the manufacturing industry here has been booming.

Latest figures from the Singapore Purchasing Managers' Index (PMI) earlier this month showed that the manufacturing sector expanded for the seventh straight month last month, with nearly all indicators showing a faster rate of growth.

So it comes as no surprise that the 10 biggest IT stocks listed on the SGX averaged a 25.7 per cent total return in the first quarter of this year. All of them generated gains, with eight generating double digit gains.

Returns ranged from 4.3 per cent for electronics and batteries firm GP Industries to 48 per cent for TPV Technology, which produces computer monitors, TVs and other display products.

These IT stocks with large market capitalisation also showed good value and yields for investors, with an average return on equity (ROE) of 14.2 per cent over the past 12 months and maintaining an indicative dividend yield of 4.0 per cent.

These two key financial ratios are higher than those of the MSCI AC Asia Pacific Information Technology Index.

It is not just retail investors who are keen on these stocks.

Last month, the IT sector was subject to institutional inflows amounting to $26.9 million - semiconductor firm UMS Holdings and electronics manufacturing services company Venture Corporation saw the most institutional buying.

UNEVEN

Nonetheless, investors should note that the performance within the electronics sector has been uneven, according to the annual economic survey conducted by the Ministry of Trade and Industry (MTI).

The strong expansion in electronics production last year was driven mainly by a recovery in global semiconductor demand.

The electronics cluster expanded 16 per cent last year, reversing the 6.8 per cent contraction in 2015 - this was driven by robust growth in the semiconductors segment, which rose 31 per cent.

In the fourth quarter of last year, the electronics cluster grew 33 per cent, supported primarily by the semiconductors segment, which expanded 62 per cent.

The strong performance of the semiconductors segment comes on the back of a recovery in global demand, especially in the later part of last year.

According to the World Semiconductor Trade Statistics, global semiconductor sales surpassed the expectations of many analysts, surging by around 12 per cent in the last quarter of last year - a major hike from the 3.6 per cent increase in the preceding quarter.

The smartphone - specifically Chinese-made ones like Oppo, Vivo and Huawei - is behind the burgeoning demand for semiconductors, MTI's report noted.

This benefitted the semiconductor firms here that supply to these smartphone producers.

PERSONAL COMPUTER

But the rise of the smartphone has led to the fall of the personal computer - output in the data storage and info-communications and consumer electronics segments declined 12 per cent and 19 per cent, respectively.

Investors should also bear in mind that the strong performance of the IT sector could be short term.

Besides IT, the other best performers of the past month were materials, which gained 9.1 per cent, and real estate management and development, which gained 7.0 per cent.

The SGX report noted: "A common thread of the three sectors is that they are classified as cyclical, while the three least performing sectors last month were classified as defensive.

"Businesses within the three cyclical sectors are highly sensitive to the market prices of their respective inventories and services.

"These prices can change with a degree of cyclicality that coincides with macroeconomic outlooks for the respective regions."

Nonetheless, analysts from DBS Bank are upbeat for now.

Commenting on last month's stellar manufacturing figures, the report stated: "... The modest easing, as seen in (February), is mainly due to the Chinese New Year effect and industry-specific cycles (i.e. pharmaceutical).

"It is transient in nature and hence, the bounce back last month should not come as a surprise at all. Going forward, expect the PMIs to remain biased on the upside as the global outlook is expected to continue to improve."