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With Asian technology companies seemingly in the crosshairs of the recent coronavirus turmoil, it is worth noting that this latest crisis is just another in a long string of challenges faced by this hard-luck sector over the past two decades. Indeed, few sectors have weathered so many shocks since the late 1990s. First up was the Asian financial crisis, followed by the bursting of the tech bubble, the SARS scare, the global financial crisis, the Thailand floods, the Japanese earthquake, the US-China trade war, and now COVID-19. As a result, I think it’s fair to say that Asian tech companies have grown quite resilient in the face of hardship (Figure 1). I call them the “Navy SEALs” of the global economy.
What now? With no crystal ball to peer into, I can only rely on my own experience as an investor. And I see no reason why the current crisis should be much different from past episodes. Asian tech stocks may have led the way into the storm, but if history is any guide, they (especially the hardware stocks) may also lead the way out of it. This is because technology is so ubiquitous and pervasive in the global economy that it has become nearly 100% coincident with what is happening in real time. Asia tech can be thought of as the “canary in the coal mine,” so to speak, meaning it may be a good place to be positioned for the eventual recovery.
With that in mind, I would not necessarily rule out a second-half rebound in sector fundamentals. Having listened in on conference calls with many Asian tech companies, I believe the situation on the ground is much better than might be expected:
- Demand actually appears to be pretty strong or at least “delayed strong,” meaning the intentions are there, even if not fully acted upon yet.
- Many factories are nearly fully back in operation as of this writing, while utilization rates are high and inventories low.
- Prices for many products have been going up and should rise again in April when new second-quarter contracts are signed.
I believe this relative strength and optimism are being driven by the same trends and forces I highlighted earlier in the year: 5G equipment and handset demand, inventory restocking, memory market recovery, China localization, Chinese semiconductor development, and migrating supply chains. The only area that looks dubious to me is the auto market, but that could change dramatically if China stimulus comes through.
My bottom line: COVID-19 is having a sharp, but likely a fairly short-lived, impact on business in Asia “tech land.” Asian technology is first and foremost a manufacturing sector, as well as a virtual one (the internet), but it is not much of a service sector. And for once, service sectors and industries appear to be the ones hardest hit by this particular crisis.
What am I doing about it from an investment standpoint? Not much. Most of the Asian tech stocks that I like are companies I see as having the best long-term structural outlook to take advantage of a new cycle, which is merely delayed at this point. If the situation were to worsen significantly, especially in China, I would likely favor investments in China A-share tech stocks that have been benefiting from localization and semiconductor industry development.