Analysing the bright outlook in Asia tech

Yash Patodia, Sector Co-Lead, Asia
Brian Yeong, Investment Specialist
2024-03-31
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The views expressed are those of the authors at the time of writing. Other teams may hold different views and make different investment decisions. The value of your investment may become worth more or less than at the time of original investment. While any third-party data used is considered reliable, its accuracy is not guaranteed.

We asked Global Industry Analyst Yash Patodia for some insights on the Asia technology sector. Below, we share his responses.

Brian: We began the 2020s with a great deal of optimism about the role of technology and innovations to come. Looking forward, what is your outlook for the Asia technology sector?

Yash: Over the long term, I remain extremely positive. Technology is advancing rapidly; we are seeing significant leaps in artificial intelligence (AI), quick progress in electric vehicles (EVs) and large investments in the new platforms such as augmented reality (AR), virtual reality (VR) and the metaverse.

Figure 1
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I find upstream opportunities most attractive as we can see accelerated demand in leading-edge semiconductor products, hardware and software applications that are the building blocks of these future innovations.

Asia’s semiconductor and hardware companies will continue to be at the heart of the semiconductor supply chain. The supply chain remains relatively consolidated, with technology, know-how and scale serving as barriers to entry. These companies are poised to benefit from the secular growth in demand for more advanced chips as global digital tools and services improve and expand.

Similar to the transformational influence of smartphones, AR could redefine our world. Smartphones aren’t just phones, they’re personal encyclopedias, devices for entertainment, e-commerce, navigation and medical applications. Similarly, AR could not only redefine how humans communicate virtually, but also how they interact with data. Consumer electronics companies are investing to produce the next industry-defining piece of hardware.

Asia’s semiconductor and hardware companies will continue to be at the heart of the semiconductor supply chain.

Yash Patodia
Global Industry Analyst

Another up-and-coming innovation is silicon carbide (SiC). SiC is a speciality semiconductor material with the potential to enable the energy transition away from fossil fuels because it can be used as a more efficient power alternative to traditional silicon. The compound is making its way into EVs and energy storage systems. In the longer term, we believe it can be used in other high-voltage applications required by expanding digital infrastructure and other industrial applications.

Accelerating trends in automation have also birthed attractive opportunities. Several Asian economies with ageing workforces are open to adopting automation through hardware and software. I believe that many companies in the region are beneficiaries of the continuing industrial automation. Additionally, I expect companies and governments to increase spending on software products. Asia remains relatively underpenetrated in software spending and there will be opportunities for domestic players to become leaders in local markets.

I would balance my optimism by reminding investors that the path forward will not be linear. While the longer-term outlook may remain attractive, we should be aware that technology is a cyclical industry tied to global growth. Volatility has increased across the sector and global equities more broadly, as economic growth has slowed. Other long-term challenges include geopolitics, which remains uncertain, and the fragility of global supply chains, which the pandemic exposed.

Brian: Your long-term outlook remains robust. Do you see opportunities in the near term amid China’s reopening?

Yash: We are seeing capital flow back to the Chinese internet sector as the regulatory environment has become more favourable. The big upswing in sentiment as China has begun to reopen its economy has undoubtedly been positive for the fundamentals of Chinese technology companies. We have been selectively positive on several Chinese internet companies, where valuations and sentiment were initially very depressed. That said, we have been more cautious about taking broad-based exposure to China tech because there are more nuances to investing in China today than in the prior 10 years.

Elsewhere in Asia, there are growing investment opportunities within India and Southeast Asia. Companies in these sub-regions are younger, and they have the potential to experience growth rates similar what corporates in China experienced a few years ago.

Against the current backdrop, companies that are well exposed to long-term technology trends that support earnings but are trading at undemanding valuations could be attractive.

Brian: Are you worried about the sector’s sharp cyclicality? The significant decline in 2022 suggests that the market was shocked by how volatile Asia technology companies’ earnings could be.

Yash: I view technology as a secular growth sector. Like all industries, short-term cyclicality is expected. The conditions leading up to the retreat in the sector last year were unprecedented. There was a tightening of global monetary conditions amid a conflict in Ukraine while China was locked down for much of the year. These macro drivers came on the heels of an extremely positive run for tech, partially driven by the multi-year, pandemic-induced shortfall in the supply of critical components in the tech supply chain. This resulted in a pulling forward of orders and in the adoption of many innovations, including remote working. Now that we are largely in a normalised post-COVID environment and the global economy is slowing, that demand is being digested.

Offsetting some of these concerns has been the industry consolidation around technology leaders, which has resulted in a more rational ecosystem. This is positive because it allows the industry to be more dynamic in adjusting supply to match demand while growing at a measured pace. For example, we’ve seen semi-memory companies quickly cut supply and capital expenditure, which did not happen in the past. Semiconductor equipment has seen more stable order books, given longer lead times, than more cyclical areas of the ecosystem like machine tools.

Asia remains the foundation for the global technology supply chain, the bedrock of innovation.

Yash Patodia
Global Industry Analyst

At a more macro level, I believe that recent volatility has priced in near-term weakness in the global economy, but not a severe recession. We are paying close attention to industry and company fundamentals; notably, company earnings reflect a softening of near-term demand. A deep recession in the West would be a tail risk for the sector.

We believe the long-term outlook over the next three to five years remains robust for semiconductor demand and the broader tech ecosystem. Asia remains the region with the highest spending on research and development globally, putting it at the forefront of innovation. We believe Asia remains the foundation for the global tech supply chain, the bedrock of innovation.

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