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The Asia tech sector’s strong performance in 2020 has some investors asking, “Are we too late?” In our view, the answer is an emphatic “no” and Asia tech continues to offer a long runway for growth. Though there are areas of the market where valuations are currently elevated, we believe Asia tech provides plentiful opportunities powered by numerous persistent secular tailwinds, making it an attractive sector over the long term regardless of today’s valuations.
Technological progress has endured for decades across all kinds of economic environments. Since the 1970s, computing power has doubled on average every two years — even continuing during the weak economic growth that followed the global financial crisis. This translates to smaller and faster computer chips powering new innovations. In our view, the technology to fuel future progress is now being designed and manufactured in Asia.
But Asia tech companies are not just developing better computer chips, they are also at the forefront of innovation in nearly every segment of the economy. Technology has become as important as oxygen to companies and consumers alike. We think it is a universal disruptor that companies must invest in to compete and grow. COVID-19 has shown this trend to be more relevant than ever. The pandemic has accelerated many of technology’s most compelling themes and increased tech adoption as people realize the countless ways innovations can provide solutions to the challenges of the crisis.
In this piece, we share an overview of our case for Asia tech, profiling its long-term secular tailwinds, highlighting why investors should consider a standalone Asia tech allocation, and exploring four key growth drivers underpinning our strong belief in the sector.
Technology drives human progress
Technology is the application of scientific knowledge for practical purposes. In this way, technology drives human progress. We believe developments within Asia tech will offer practical remedies — like those seen during the pandemic — to many of the world’s challenges over the coming decades. For example, as data generation rapidly expands (Figure 1), we think Asia tech will provide the building blocks for faster networks, more data centers and new neural networks that will replace older central processing units. Improved data centers will allow data to be stored together in a central location, allowing for faster, more efficient use of data for myriad applications.
Importantly, over the next half century, economists no longer expect population growth to add to global economic growth (in Figure 2, note the shrinking light blue bars). Countries across the developed world and emerging economies are thought to have their best days of population growth behind them. As populations continue to age, we face a productivity challenge, with economic growth projections below 2%. Instead, we will need tech innovation to counter this slowdown.
Why Asia tech may be underrepresented in global tech
Asia is the population center of the world, is the home of the world’s technology supply chain and tech manufacturing, and, in our view, is the future innovation hub of much of the world’s GDP. For example, Asia is home to a huge number of small tech companies that can offer pure-play exposure to key technology themes like 5G, electric vehicles, smart phone manufacturers, and many more. The Asia technology sector currently offers 70% of the companies in the opportunity set but represents only 17% of the MSCI All Country World IT Index.1 In fact, Asia tech has significantly more small tech companies than the rest of the world combined (Figure 3). We think there is a common misconception that global tech offers sufficient exposure to Asia, but in fact the vast majority (75%) of the MSCI All Country World IT Index is actually US-based.2 This means investors with traditional global technology or passive tech exposure may drastically miss the breadth and depth of Asia’s technology market.
We believe the Asia tech sector will continue to provide novel solutions across industries and geographies. In our view, it is critical for investors to get adequate exposure to this increasingly important opportunity set. We think the sector’s steady progress will persist and the resulting technologies will power both the digitization and the advancement of our lives. Asia tech’s continued growth will, in our view, help fuel cheaper and more accessible products and services, increased efficiency, greater sustainability, and improved social and economic equality, among other societal benefits. In particular, we believe four long-term growth drivers will consistently push Asia tech forward.
Asia tech’s enduring growth drivers
- Faster, smaller and more powerful chips: enhancements in integrated chip design — fueled by Asia tech companies — hold the potential to enable significant software innovation.
- The critical role of pervasive tech: technological innovations are increasingly disrupting nearly every segment of the economy, powering opportunities for Asia — the world’s hub of innovation.
- Local solutions for local markets: many of Asia tech’s markets are closed to outside competition or require intricate local knowledge. From Japanese software to Chinese supply chains, we believe local firms will therefore capture lasting growth that will be less susceptible to geopolitical risks.
- The hidden tech story in Japan: demographic trends and idiosyncratic cultural factors in Japan are driving opportunities for innovative tech solutions in industries like fintech and recruitment.
Potential risks for Asia tech
The Asia tech sector is not without risks. In our view, there are several potential risks to our long-term outlook for the sector. Technology is an economically sensitive industry and may underperform if global growth slows. In addition, tech is made up of subsectors that have their own mini cycles within the overall tech cycle, which can cause dispersion within the sector. Valuations in some areas are also a potential concern given the sector’s strong recent performance, making active management critical to the opportunity set, in our view. Furthermore, regulations are likely to have an increased impact on the sector as countries react to tech’s growing importance to consumers and economies alike. Finally, interest rates are very low today and if they do increase substantially, this could affect the sector’s outlook.
Technological innovation has marched on through the global health crisis, trade wars, and economic cycles. Despite these sources of increased volatility, technological progress and adoption have continued to accelerate. Furthermore, despite potential risks like valuation, we believe there are numerous secular growth drivers fueling the long-term case for Asia tech.
1FactSet, Wellington Management, MSCI All Country World IT Index. Data as of 31 December 2020. | 2MSCI All Country World IT Index. Data as of 31 December 2020.
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