Crouching tiger, hidden dragon?
Blair Modica
Betashares
Volatility is nothing new for Asian markets, however the last few months have seen the substantial gains of the previous twelve months unwind, with uncertainty creeping into the sector.
We see three key stories emerging from the Asian technology sector:
- The threat of ongoing regulation of Chinese businesses at home and of Chinese companies listing offshore
- The relative price discount relative to international counterparts due to this uncertainty
- Why this might represent a long-term buying opportunity
Asian technology markets are off 15% from their February highs – should we buy the dip?
Household Asian technology names have seen
increased volatility, and unwound some of the gains enjoyed during the Covid
crisis. For example, Alibaba has lost around one third of its value since its
peak last year and is currently trading at a significant discount to its
American counterpart Amazon. Similarly, Samsung is down around 15% and is
currently trading at a significant discount to the PE of its American
counterpart Apple. (1)
It is worth considering the demographic case for investing in technology, specifically in Asia.
Over 900 million people are currently online in China (2), and this extends to 2.7 billion (3) people in greater Asia. We are seeing the expansion of a strong middle class in the Asia-Pacific region, which is forecast to make up nearly 66% of the global middle-class population by 2030 and should continue to bolster consumer spending domestically (4) over the course of this century.
With this in mind, it is clear that Asian companies that operate online will benefit from multiple tailwinds over the course of the next fifty years.
Asian technology companies tend to have diverse revenue streams, and are able to drive revenue and earnings across multiple platforms and sectors. For example, advertising slumped on Tencent’s WeChat network last year, but its video-gaming franchise surged during lockdowns. Similarly, Alibaba was able to offset falling consumer spending with rising demand for its cloud services over the course of the last few years.
Solid earnings growth is expected.
The titans of Asian technology and online retail are forecast to maintain significant sales and earnings momentum as online payments are established as the predominant transaction platform.
Regulatory issues are ‘short term pain – long term gain’
Regulatory issues are a valid concern when considering an investment in the Asian technology sector, however, we need to remember that the Chinese Government recognises the technology sector is a growing, and already crucial part of their economy, and is an industry which is now maturing. The benefits from increased investment and growth within the Chinese technology sector flow not only to the industry and the Chinese economy, but also to the Chinese Government.
It’s also important to understand that ongoing regulatory risk affects other technology economies as well, for example U.S. regulators are looking at antitrust proceedings against the big U.S. tech names. As is the case in China, however, the technology space is vital for the U.S. economy. Regulators know this, and want to protect competition and foster continued investment and growth.
Alibaba, Tencent and other major Chinese tech companies have been targeted by Chinese regulators looking to assert control, and up until this point, they have been keen to keep the regulators happy.
These companies are local champions, and have an innate understanding that they must keep the state onside, so they have recently announced increased investment in the cloud, artificial intelligence (A.I.), autonomous driving, robotics, and logistics – all tech priorities for the state.
Tencent has even earmarked US$8 billion for public welfare investments. The tech companies are ensuring they remain onside with the state, while for the state’s part, they are keenly aware of the importance of these companies to the Chinese economy.
Part of the situation is political positioning, with Chinese regulators wanting to encourage domestic listings. However, regulators are also concerned about longstanding problems such as personal information collection and cross-border data flow, which from a national security point of view may be valid.
To gain a perspective from inside the regulator’s ecosystem, the Chinese state-sponsored publication, The People's Daily: (5)
“Internet giants with immense data and advanced algorithms should shoulder greater responsibility, aim higher and do more in tech innovation… but this is a fine line to tread for the state, as the state and its tech firms need each other, as tech companies drive innovation, efficiency and stimulate the consumer economy”
It is clear that there lies a middle ground between regulation and unabashed growth.
Semiconductors could protect from reflationary worry
In discussions with clients, we have spoken of the global semiconductor shortage given that auto manufacturers scaled back car production at the beginning of the pandemic, only to see a huge increase in the demand for chips in other areas of the market as Covid dragged on.
Asian giants Samsung and Taiwan Semiconductor are household names when it comes to the production of semiconductors. Should we see further interest rate speculation on the upside, this could be seen as a positive for these businesses, given the price inelasticity and relative specialisation that goes into making semiconductor chips.
Furthermore, China is investing heavily in semiconductor manufacturing complexes — accounting for more than half of global construction spending in this space - though Chinese manufacturing capabilities are reportedly still far behind (approximately five years) that of Taiwan or South Korea – further good news for the Chinese technology growth story.
Asian tech may be one of the best spots to look for emerging markets growth in this environment
Traditional BRIC emerging markets exposure is somewhat skewed in terms of growth profile, e.g. Russian oil and gas and Brazilian iron ore in our view aren’t necessarily attractive investments at this point in time. This leaves you with emerging Asia and its rising technology sector, which can produce scalable growth alongside its huge online population.
Australian investors can gain exposure to Asian technology companies via the BetaShares Asia Technology Tigers ETF (ASX: ASIA), which provides exposure to the 50 largest Asian technology companies (ex-Japan) in a single ASX trade. Samsung and Taiwan Semiconductor currently make up around 20% of ASIA’s portfolio.
(2) InternetLiveStats.com - 21/07/2021
(3) https://www.internetworldstats.com/stats.htm - 21/07/2021
(4) Asian Consumers.” Deloitte Insights, Deloitte, www2.deloitte.com/us/en/insights/economy/asian-consumer-spending-growth.html
(5) (VIEW LINK)
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Blair is responsible for supporting the distribution of BetaShares funds to Advisers across Victoria, Tasmania and South Australia. Previously, Blair worked at Macquarie Bank in Distribution and Key Account roles within the Specialised Investments team. He has also held roles within NAB Wholesale Banking. Blair holds a Bachelor of Arts (Politics & History) and a Master of Management (Finance) from Melbourne University.
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There are risks associated with an investment in ASIA, including information technology risk, concentration risk, emerging markets risk and currency risk. ASIA’s returns can be expected to be more volatile (i.e. vary up and down) than a broad global shares exposure, given its regional focus and concentrated country and sector exposure. ASIA should only be considered as a component of a broader portfolio. For more information on risks and other features of ASIA, please see the Product Disclosure Statement, available at www.betashares.com.au.
This article contains general information only and does not take into account any person’s objective’s financial situation or needs. Investors should consider the appropriateness of the information taking into account such factors and seek financial advice. Past performance is not indicative of future performance.
BetaShares Capital Limited (ABN 78 139 566 868 AFSL 341181) (BetaShares) is the issuer of the BetaShares Funds. Before making an investment decision, investors should consider the Product Disclosure Statement (PDS), available at www.betashares.com.au, and obtain financial advice.
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Blair Modica
Director, Adviser Business
Betashares
Blair is responsible for supporting the distribution of BetaShares funds to Advisers across Victoria, Tasmania and South Australia. Previously, Blair worked at Macquarie Bank in Distribution and Key Account roles within the Specialised Investments...
Blair Modica
Director, Adviser Business
Betashares
Blair is responsible for supporting the distribution of BetaShares funds to Advisers across Victoria, Tasmania and South Australia. Previously, Blair worked at Macquarie Bank in Distribution and Key Account roles within the Specialised Investments...
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