Looking beyond Covid-19: Asia technology is the 2020 theme for investors
Markets scrutinised since coronavirus outbreaks
Assumptions about Asian equity markets are being called into question amid a short-term reassessment by the region's companies over the coronavirus fallout.
While much remains unclear, as people stuck at home flock to e-commerce platforms to shop, probably cementing online habits, there are powerful structural trends underpinning technology innovation across Asia - and those themes are unchanged. In fact, 2020 may be the year Asian technology goes from exciting to in the ascendancy.
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There is a massive, multi-year monetisation opportunity in gaming, e-commerce and enterprise software, while in hardware, there is demand for Asian supply chains in cloud computing, automated driving, smartphones and fintech.
Asian technology leaders have lagged behind their counterparts in the US due to weaker sentiment, first from trade war worries and, more recently, from the coronavirus. These fears risk discounting the powerful growth potential of these companies.
The rise of the middle class, the increasing need for technology insourcing and the 5G rollout are some reasons to take a brighter view.
5G technology can help companies improve efficiency and expand margins. And the investible universe boosted by 5G is not limited to just smartphone hardware suppliers or telecommunication companies.
Improved connectivity offered by 5G will provide a better platform for gaming and online shopping.
On the corporate side, there is huge potential in enterprise software platforms, with 5G enabling further developments related to cloud computing and the internet of things.
Even banks could benefit from 5G, as mobile services are increasingly important in revenue generation.
It is essential to look at the fundamentals of individual companies when analysing 5G investment opportunities.
The most attractive companies include the leading semiconductor manufacturers, particularly in memory chips, 5G and smartphone-related processors, as these companies dominate the global market share.
Continuous research and development efforts and growth in insourcing demand will sustain that dominance.
Furthermore, there is a growing trend of technology companies paying out attractive dividends, proving that investing in technology is not only about growth but also income.
Conventional perception may point people towards powerhouses such as the US and Europe, but market data suggests otherwise.
Benefiting from the rapid growth and unique demographics in Asia, some local champions have emerged, not only as the best within the region but also the world.
Within the Asia technology story, China is too big to ignore. The vibrancy of its equity markets, the "Made in China 2025" plan, and the MSCI Index inclusion have made a compelling case for Chinese equities to be considered as a separate asset class in portfolios.
The 5G roll-out is powerful for A-shares, providing a significant boost to e-commerce, smartphone upgrades, the internet of things and gaming companies, especially with such a massive middle-class population eager to spend.
Moreover, corporate China's adoption of enterprise services, including Software-as-a-Service (SaaS), cloud computing and data servers has just begun. The coronavirus outbreak just highlights the need for more corporate spending in these areas.
Elsewhere in Asia, Japan's technological prowess is often overlooked. Historical strengths, such as motor manufacturing and consumer electronics, have been replaced by innovations in the new economy, where Japan's robotics and automation companies have gained global market leadership.
Growth opportunities abound across Asia, with local champions in information technology services and small and medium-sized enterprise software services expanding their market share in India and Australia.
Asia's technology winners or industry leaders will have better resources and research and development capabilities to extend their dominance, and good management to guide the business through difficult times. Often, the strong emerge stronger and outsize returns will accrue to them.
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In addition, recent volatility is likely to accelerate industry consolidation, benefiting the market leaders.
The virus outbreak will, no doubt, bring short-term challenges to supply chains and logistics, but it is also likely to accelerate the time spent online, fuelling the use of automation and a push for efficiency by Asian software companies.
Coupled with the region's growing superiority in invention and innovation, the case for investing in Asian technology in long-term portfolios has never been stronger.
Joanna Kwok is a portfolio manager on the JPM Asia Growth fund
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