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Asian Equity: A case for Asia tech

The ascension of the digital economy in Asia presents a vast array of opportunities to participating businesses and equity investors.
24 June 2020
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    The importance of the tech sector within the global economy has become increasingly evident in recent years. When speaking of tech dominance, people often refer to the US market, where the top five companies, by market captialisation, of the S&P 500 index are all household tech names. According to Goldman Sachs Research, the information technology and communication services sectors combined account for 38 per cent of the US equity market, having grown from 22 per cent ten years ago. That said, the rise of the technology sector is by no means a unique phenomenon in the US; Asian tech names are also becoming increasingly recognized on the global stage. The combined weight of information technology and communication services in the Asia Pacific ex Japan equity market currently stands at 28 per cent, up from 19 per cent ten years ago.

    The bottom line is: the traditional economy is ceding ground to the digital economy – a trend that the recent COVID-19 pandemic has served to accelerate.

    Fig. 1: Weight of IT and communication services in equity markets

    Fig. 1:  Weight of IT and communication services in equity markets

    Source: Worldscope indices; Goldman Sachs Research, data as of June 2020

    One could think of the Asian tech space as loosely being composed of two partitions: virtual and hardware. The virtual space represents companies that render digital services to the public, encompassing areas such as cloud computing, e-commerce, online entertainment, search engines, etc. The hardware companies, on the other hand, produce the physical infrastructure and equipment that the virtual space runs on. We see vast opportunities in the Asia region for tech companies in both spaces.

    Virtual tech in Asia

    Today, tech companies provide so much of the services that we enjoy and that we would have a hard time to do without, be it e-commerce, social media or online video streaming. Asia has not been slow in embracing the digital economy. In fact, one could even argue that Asia leads the world in some aspects of virtual technology – one notable example being mobile payment. A key reason why Asian countries are leading the world in mobile payment is that their traditional payment infrastructure was, compared with the West, much less developed and convenient to begin with. For example, credit cards had never gained popularity in Asia the way they had in the West. The arrival of mobile payment technology was most welcome by Asians, who saw it as a far superior alternative to facilitate retail transactions, whereas the inertial tendency opposing the transition to mobile payment platforms is much stronger in developed countries where there are other convenient, albeit less modernised, means available already.

    Fig. 2: User penetration (%) in the mobile point-of-sale segment* in 2019

    Fig. 2: User penetration (%) in the mobile point-of-sale segment* in 2019

    * The Mobile POS Payments segment includes transactions at point-of-sale that are processed via smartphone applications (so-called “mobile wallets”)

    Source: Statista Digital Market Outlook, data as of June 2020

    Unsurprisingly, e-commerce and online entertainment companies in the region have benefitted from the COVID-19 pandemic, as people have been forced to stay home due to lockdown measures of various extents. Rather than just a short term boost to the usage of these services, we see the pandemic as a catalyst that accelerates the already ongoing structural change of people conducting more of their economic lives on the internet. Moreover, the advent of 5G, which will take place over the next couple of years, will open up opportunities for new services to be provided to the public over the web.

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    Hardware tech in Asia

    The rapid increase in the consumption of data in Asia – a trend that is being strengthened by people spending more time at home due to COVID-19 – will necessitate an eventual rollout of 5G in the region. The increase in demand for 5G-compatible network infrastructure and 5G smartphones will benefit certain Asian economies that are key contributors to the 5G supply chain – namely Taiwan, South Korea and China. For example, Asia’s semiconductor manufacturers, which dominate the industry with close to 80 per cent of global market share, will stand to benefit from a rise in demand for processing chips and memory chips due to the 5G revolution.

    Fig. 3: % of global memory chip exports by origin

    Fig. 3: % of global memory chip exports by origin

    Source: ITC, HSBC Global Research, data as of June 2020

    In the case that the effects of COVID-19 will linger with us for some time to come, smartphones and laptops will also see a general increase in demand due to a rising need for remote communication and extended “work-from-home” arrangements. China, and increasingly other developing economies in Asia, dominate the global production of these products as well.

    Investment involves risks. Past performance is not indicative of future performance. Any forecast, projection or target contained in this presentation is for information purposes only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecasts, projections or targets. For illustrative purposes only.

    The views expressed herein do not constitute investment advice, research or trade recommendation. Such views are the personal views of the author only and do not necessarily represent the views of HSBC Global Asset Management (Hong Kong) Limited.

    The information contained in this publication is not intended as investment advice or recommendation. Non contractual document. This commentary provides a high level overview of the recent economic environment, and is for information purposes only. It is a marketing communication and does not constitute investment advice or a recommendation to any reader of this content to buy or sell investments nor should it be regarded as investment research. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of its dissemination. The performance figures displayed in the document relate to the past and past performance should not be seen as an indication of future returns. Any forecast, projection or target where provided is indicative only and is not guaranteed in any way. HSBC Global Asset Management accepts no liability for any failure to meet such forecast, projection or target.

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