This is a sponsored article from J.P. Morgan Asset Management
It’s a cliché but for the technology sector the only constant really is change. Underpinned by a societal shift to the online world for almost all aspects of work and life, technological services and products across the globe saw a significant pull forward of demand and adoption. As a result, many of these companies performed strongly in 2020.
Some investors may raise concerns about the valuations of the overall sector, as the MSCI AC Asia Pacific Information Technology Index has trended up by over 89% over the past year as of end March 20211. But when it comes to investing, and especially in technology, it is arguably more important to be forward looking as opposed to be backward looking. And in our view, the future looks increasingly bright for the Asian technology landscape, as we continue to see innovation and growth, coupled with favourable demographics and supportive government policies. It is clear that there is an abundance of investment opportunities available in Asia.
Identifying the next rising star in Asia
Asia currently holds advantages in a number of areas, and we believe that Asia technology stocks have equally bright, if not even brighter prospects than their counterparts in Europe and the U.S.
Firstly, while Asia has been ahead of the curve in containing the pandemic, what the pandemic has actually done is that it’s significantly accelerated the pace of digitalisation in the region. More importantly, this trend is unlikely to reverse course even as the pandemic recedes. The pull forward of adoption is clear in many areas across the region, such as in enterprise software solutions and e-commerce, where both corporates and consumers are really seeing the benefit of the cloud shift.
Secondly, localisation of research and development (R&D) and domestic innovation are becoming new growth drivers for the region. For example, China has made clear in its 14th Five Year Plan its ambition to become a technological powerhouse, setting “high-tech self-sufficiency and self-reliance” as its primary policy goal, and has committed US$1.4 trillion to its digital infrastructure upgrade. An outcome of that is that the country will strengthen its capability to self-develop and reduce its dependency on imported tech components such as semiconductors. More importantly, we believe this R&D and capital expenditure is paving the way for innovation for many years to come.
Thirdly, with the development of Asia’s capital markets, there has been a healthy pipeline of initial public offerings (IPO) activities2 in recent years. In turn, this has opened up a huge pool of investment opportunities for investors looking at Asia’s technology companies. For example, many of those rising stars will likely come from Southeast Asia and India.
Our JPMorgan Pacific Technology Strategy3 seeks to capture these opportunities by taking a concentrated, high conviction, long-term approach by investing in the leading companies within Asia technology sector.
Key Growth Opportunities Honed-in on 5 Key Themes3
In general, we believe there are five key themes3 that reflect long-term structural growth opportunities.
A. Internet & Content:
Enterprise Software: Compared with the US, China’s software applications market still have potential to witness a rising growth rate4. The Japanese government has set up a dedicated department to promote digital transformation. We believe the adoption rate of future enterprise software across the region – in particular Software-as-a-Service (SaaS) – will accelerate even further.
E-Commerce: Consumers in ASEAN and other markets such as India are still at the early stages in term of e-commerce penetration5. Within the region, online purchasing is getting ready for take-off, offering quite a number of opportunities for investors.
Video games have become an indispensable source of entertainment for people of all ages. Asia currently represents 54% of the world’s total gamers and contributes 50% of the total global gaming revenue6. As the mobile gaming markets in China, India and Southeast Asia continue to boom, we believe they will keep gaining market share of the global video gaming industry.
C. Manufacturing leaders:
Hardware is the backbone behind all the advanced technology applications of 5G, high-performance-computing, Internet-of-things, artificial intelligence, virtual/ augmented reality etc. Over the past decades, Asian manufacturers have evolved from being a low-cost follower to global leaders.
Smart devices have brought revolutionary change to our daily life in the past decade and the premium smart device supply chain is dominated by Asian companies. While further technological breakthrough is yet to emerge, select Chinese makers have been gaining market share from their Taiwanese or Korean peers, not only due to cost advantage, but also due to more advanced technological know-how. The ongoing localisation of the supply chain is a multi-year tailwind for Asian component suppliers.
Industrial automation is on a structural growth trend, as global manufacturers try to reduce labour costs and improve operational efficiency, amid the incremental reshoring of production. Specifically, while adoption of industrial automation (IA) is still in a nascent stage, and there remains huge secular growth potential across the robotic, vision and laser industries.
At this juncture, some investors may raise doubt about valuations of certain technology stocks. Yet, different from the tech bubble in the early 2000s, we believe that today’s tech companies offer a more different story. We expect strong fundamentals such as earnings growth, driven by favourable structural tailwinds, and a relatively lower valuation of Asia tech stocks7 in general – to provide support for the Asian technology sector in the long term.
That said, investors should understand the risks of investing. One should look to invest for the long-term, yet be mindful that volatility will be inherent in the short-term. At J.P.Morgan Asset Management, we believe having our robust research framework and a disciplined investment process, will help investors navigate today’s ever-changing market.
1. Source: MSCI, data as of 31 March 2021
2. Source: Bloomberg, data as of Jan 2021
3. Source: For illustrative purposes only based on current market conditions, subject to change from time to time. Not all investments are suitable for all investors. Exact allocation of portfolio depends on each individual’s circumstance and market conditions.
4. Source: J.P. Morgan Research and Gartner Research estimates, data as of end of Nov 2019
5. Source: Bloomberg, J.P. Morgan Asset Management, data as of Feb 3rd, 2021
6. Source: J.P. Morgan Asset Management, data as of end of Jan 2021
7. Source: Factset, J.P. Morgan Asset Management, data as of end of Feb 2021, MSCI technology index
For Professional Investors and Financial Intermediaries only.
This advertisement or publication has not been reviewed by the Monetary Authority of Singapore and the Securities and Futures Commission in Hong Kong. Investments are not comparable or similar to deposits. Investment involves risk, value of investments may rise or fall including loss of any or all of the amount invested. Not all investment ideas are suitable for all investors. Past performance is not indicative of current or future performance. Diversification does not guarantee positive returns or eliminate risk of loss. Investors should make their own evaluation or seek independent advice before investing. The opinions and views expressed here are as of the date of this publication, which are subject to change and are not be taken as or constructed as research or investment advice. Issued in Singapore by JPMorgan Asset Management (Singapore) Limited (Co. Reg. No. 197601586K) and in Hong Kong by JPMorgan Funds (Asia) Limited. All rights reserved.
This is a sponsored article from J.P. Morgan Asset Management