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The Asia tech sector’s outperformance versus the broader market has persisted amid the substantial uncertainty and volatility of the COVID-19 pandemic (Figure 1). The sector’s strong rebound has led some investors to wonder about the outlook for Asia technology going forward. In our view, the sector will continue to offer very compelling investment opportunities throughout the 2020s. We began this series noting that technological progress has become as important as oxygen to companies and consumers alike. The current environment has made that statement truer than ever before.
Our conviction in Asia tech’s long-term growth is bolstered by enduring structural tailwinds, many of which have been strengthened by the coronavirus crisis. In particular, three key trends support the sector:
1. Asia is the main supply chain for the broader tech sector. Although some supply may shift to Europe and the US as companies look to diversify supply chains and expand domestic supply, we believe Asia will remain the key supplier of the rapid growth of tech.
2. The world is steadily moving towards an increasingly data-driven and digital age. COVID-19 has made the benefit of digital transformation acutely evident to companies and consumers. While some customers may go back to brick-and-mortar locations, we believe the pandemic has accelerated several inevitable shifts. Work-from-home capabilities, online ordering and digital entertainment are among the many technologies that we believe will see persistent growth.
3. Asia is becoming the world’s hub of innovation and consumption. The region offers the biggest single employment base and has the highest number of tech companies, in particular, in many lesser-known small- to medium-sized firms (Figure 2). In addition, it has the largest population centre and thereby provides a natural hub of consumption and eventually innovation.
The pandemic has hastened many of the themes driving the growth of the Asia tech sector. Looking forward, companies and economies will no doubt seek to maintain the significant pace of technology adoption from the crisis. It remains to be seen which among them will be able to use the recent boon to reinforce future growth to stay competitive. We believe these factors create a supportive structural case for the sector and will likely also cause dispersion among companies, offering attractive opportunities for active managers.
Furthermore, we think the four growth drivers outlined in our Investment bytes – Asia tech series will continue to fuel the sector’s long-term growth story.
Faster computation with smaller, more powerful computer chips. The explosion of data usage in the pandemic has made this innovation even more critical. Enhancements in integrated chip design hold the potential to enable significant growth through software innovation.
COVID-19 and the critical role of pervasive tech. The falling cost of data computation has led to the availability of tech across nearly every segment of the economy. Pervasive tech has proven essential in 2020 and we think will only expand with the advancement of 5G.
Local solutions for local markets. Many of Asia tech’s markets are closed to outside competition or require intricate local knowledge. In markets like Japan, Korea and China, we believe local firms are developing the expertise to capture lasting growth that will be less susceptible to geopolitical risks like the US-China conflict.
The hidden growth story in Japan tech. Demographic trends and idiosyncratic cultural factors in Japan are driving opportunities for innovative tech solutions in industries like fintech and recruitment. Japan’s digital transformation is even more crucial in the wake of COVID-19.
Despite the sector’s strong outperformance, and although we believe it offers enduring growth potential, Asia tech is not immune to lingering geopolitical risks and a potential second wave of COVID-19. Asia tech could be significantly impacted by the volatility from these potential headwinds. We therefore think it is important to evaluate companies with their preparedness for these potential geopolitical and pandemic-related risks in mind.
In our view, as these factors evolve, clear winners and losers within the Asia tech sector will emerge, making active management particularly important for this large and diverse opportunity set.
We think Asia technology continues to present a lasting investment opportunity with persistent structural tailwinds and growth drivers that we believe will power the sector throughout the 2020s. In our view, the pandemic has accelerated many of the sector’s most exciting trends and made technology more critical to companies and consumers than ever.
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