Investing in a product you hope you’ll never use
Insurance is a funny thing. It’s the only product that both buyer and seller hope is never used. But...
Greater inclusiveness, enhanced productivity, improved living standards and a drive towards the consumer are some of key drivers for Asia in the next decade, and information technology is at the heart of these changes.
Increased spending among Asian consumers is fuelling entirely new business ecosystems, from e-commerce to online gaming, while the long-term trends of lower debt and strong demographics have made the burgeoning of its IT sector both a necessity and a huge opportunity.
With this in mind, here are four reasons why investors should consider the unique growth of technology companies in the region.
The impact of Covid-19 is likely to be a significant catalyst for change in our lives. Not just from a healthcare standpoint, but also from a technological one. A recent Baillie Gifford update points to this as a strong indicator of new secular trends and innovation – where technology is likely to become more prominent.
It says: “Perhaps the most important change we have seen through the crisis is an acceleration in the adoption of technology, improving economies of scale and strengthening the competitive moats around some leading technology firms. China has arguably led the way, with several of the country’s internet companies seeing significant increases in user numbers and engagement under lockdown.
“Perhaps more interestingly we have seen an acceleration of innovation across the traditionally less technology-savvy parts of the region. Just as SARS was a turning point in the birth of ecommerce in China in 2003, helping establish companies such as Alibaba and JD.com, we believe Covid-19 could be doing the same for e-commerce across large parts of the ASEAN region.”*
Chris McGoldrick, deputy manager of Stewart Investors Asia Pacific Leaders, described how different types of technology companies can be found in different parts of Asia in this video interview
We’ve all seen the recent headlines that the UK’s mobile providers are being banned from buying new Huawei 5G equipment after 31 December, and they must also remove all the Chinese firm’s 5G kit from their networks by 2027.
Yet the roll out is set to continue at pace, as Federated Hermes Global Emerging Markets SMID Equity manager Kunjal Gala told us in a podcast back in May. “There are a number of interesting changes that are happening on the ground across emerging markets,” he said. “For instance, 5G rollouts are happening at a decent pace and this will also help or enable a number of other advanced technologies to be deployed, like artificial intelligence or cloud computing. We are seeing a very strong move towards digitisation and internet of things.”
Guinness Asian Equity Income co-managers Edmund Harriss and Mark Hammonds believe the ongoing wrangling’s with the US and the uncertainty over the global economy may even aid the development of 5G. They stated: “This does not mean that Asian technology is about to fall into a hole and the region along with it, but it adds further uncertainty. The development of 5G technology is going to continue and 5G telecom infrastructure spending is where it starts. Consumer demands for 5G enabled devices and industry demands for 5G‐solutions to improve operating efficiencies in production and business processes have not gone away, and in a more challenging economic environment may well be more pressing.”^
Richard Sennitt, manager of Schroder Asian Income fund, talked more about “the battleground that is 5G” in this podcast.
Software and hardware companies are supporting new forms of consumption in Asia, such as the growing popularity of online games. China is currently the world’s largest e-commerce market, with revenues expected to surpass US$1 trillion in 2020^^, while Enterprise software sales in Asia are expected to grow to US$26 billion by 2026^^.
Matthews Pacific Tiger fund manager Sharat Shroff says there are new paradigms emerging in the software space. He says: “The software side has historically included IT companies in India, as well as assorted software producers and providers across Asia. We now see the growth of Enterprise software among business of all sizes. Smaller mom-and-pop businesses that traditionally used paper-based payroll and accounting systems are moving to mobile-friendly, cloud-based systems. And larger businesses are starting to do more with their data, engaging in sophisticated data analytics for marketing and improving daily operations.”
Sharat also believes the existing hardware platform in the region will also be built upon. He says the main manufacturers of semiconductors and microchips have historically been centred in South Korea and Taiwan, although they are also seeing traction in mainland China.
This is also an area of interest for Richard Sennitt, manager of Schroder Asian Income fund. “I am overweight hardware names, particularly those based in Taiwan and Korea,” he said. “They are the beneficiaries of a couple of interrelated themes, such as the increased long-term use of the internet – which is obviously seeing a continual build out of data centres by the hyper-scalers, as more and more data is crunched online and data shifts into the cloud – and also from the increase in demand for communication products driven by this whole shift to 5G and the internet of things.”
Sharat Shroff says there is an additional opportunity in the software space – namely that a number of companies can (and are) skipping the desktop software stage and going straight to the cloud.
He said: “When we look at the software sector in the West, U.S. companies adopted Microsoft, Oracle and SAP software products a long time ago. These products began as desktop versions of software but are now slowly migrating into the cloud. In Asia, however, use of traditional desktop software has developed slowly. As a result, many companies in Asia have the opportunity to leapfrog straight to cloud-based software—similar to how many countries in Asia skipped the stage of generating hardwired telephone lines and went straight to mobile phones.”
*Source: Baillie Gifford Pacific Trust – Investment update
^Source: Guinness Asset Management Asian Equity Income fund – Market Commentary May 2020
^^Source: Matthews Asia Insights July 2020 – Asia’s Information Technology Leap