ASIA – access the growth potential of the powerhouses of Asian technology
Asian technology stocks have proven resilient during the pandemic
|Demographic trends and the Asian e-commerce environment underpin the sector’s growth potential||
Earnings momentum is expected to continue
Technology has been a standout performer globally during the COVID-19 crisis, and Asian tech stocks in particular have done well.
|Demographic trends underpin the growth potential of the Asian technology sector, and the Asian e-commerce landscape provides further support.||
Solid earnings growth is expected from Asian tech leaders, many of which have diverse revenue streams.
With fears the continued spread of the COVID-19 virus will overwhelm government stimulus measures around the world, many markets have struggled to maintain and build on the returns of Q2. However, exceptions to this trend include the global technology sector and Asian equity markets, the latter of which have rebounded by ~40% from March lows1 and are now in positive territory year-to-date. The MSCI Asia Pacific Index beat the S&P 500 Index and the MSCI Europe Index over the three-month period to the end of July.
How has Asia dealt with the virus?
Asian economies have been relatively successful in gaining control of COVID-19 outbreaks, compared to American and European counterparts. Since March 2020, reported virus cases in the region have made up less than 20% of the global count (according to John Hopkins data) allowing Asian economies to reopen 75% – 95% capacity whilst the U.S. still stands at 45-60%2.
Asian equities have outperformed the U.S. and Europe since the start of June, bolstered by optimism about China’s recovery and a sense that East Asia has handled the pandemic relatively well.
Asian stocks’ outperformance begins to show amid lower share of global virus cases
Source: Bloomberg, Johns Hopkins University. Accessed 23 July 2020. Past performance is not indicative of future performance. You cannot invest directly in an index.
How has the Asian tech sector performed?
The Asian technology sector has been one of the most resilient and defensive parts of the Asian market, and so the major contributor to the Asian equities rally has been technology-related stocks such as Tencent, Alibaba and Taiwan Semiconductors.
As many bricks and mortar businesses effectively shut up shop during lockdown periods, online companies have seen a massive rise in the number of users of and subscribers to their services.
For example, Meituan Dianping (an online food delivery, consumer product and retail services business based in China), has seen the number of users of its platform jump by 8.9% year on year to ~450 million, doubling its share price from the start of the year to 31 July 20203, and joining the 10 most valuable companies on the Hong Kong Stock Exchange.
The two largest technology companies in Asia, Tencent and Alibaba, have seen their share price appreciate over the last two months by 26% and 21% respectively4.
The chart below compares the performance of the Solactive Asia Ex-Japan Technology & Internet Tigers Index, which tracks the 50 largest Asian technology and online retail companies (ex-Japan), with the performance of the Nasdaq-100 Index year to date.
Asian Tech vs U.S. Tech YTD Index returns (to 13/8/20) (common base 100)
Source: Bloomberg. As at 13 August 2020. The chart shows the USD total returns of these indices. You cannot invest directly in an index. The chart does not take into account any fees and costs associated with an ETF that tracks these indices. Past performance is not an indicator of future performance of any index or ETF.
Is the outperformance of Asian tech sustainable?
In addition to the ability Asia has demonstrated to date to slow down the virus’s infection rate, there are a number of fundamental characteristics which have made and should continue to make the Asian region, and particularly Asian technology, an attractive market for investors.
1. Favourable demographics – Since 1980, the GDP of emerging and developing Asian nations has grown on average by 7.2% p.a., outstripping the growth of advanced economies by three times5. Asia’s young and large population of 4.6 billion (which more than quadrupled over the 20th century6), coupled with the expansion of a strong middle class (which is expected to make up nearly 66% of the global middle-class population by 20307), should continue to bolster consumer spending domestically.
Source: Oxford Economics (Global economic databank), Deloitte Services LP economic analysis. Accessed 27 July 2020
2. Largest e-commerce market in the world – The Asia Pacific region has the largest number of internet users worldwide, reaching 2.3 billion in 20198. Already Asia represents the world’s largest e-commerce market, with China alone accounting for over 50% of global online transactions9. However, with internet penetration still below the global average, there is still a huge amount of growth to be had.
3. Favourable e-commerce landscape – Unlike the U.S., where e-commerce mainly connects stores with consumers to purchase goods, Asian manufacturers can sell directly to consumers without a physical store. Alibaba, for example, is a marketplace, which does not own the inventory of the merchandise sold, and merely connects buyers and sellers together. The factory to consumer supply chain has boosted e-commerce popularity with businesses and consumers alike, resulting in online retail transaction value growing by 24% CAGR in 2017-2019 to US$1.5 trillion in China alone, larger than the next ten markets combined10.
Online retail transaction value
Online B2C and C2C market; Forecast for year-end 2019. Source: Research and MOFCOM for China, eMarketer; Mckinsey China Digital Consumer Trends 2019.
4. Diverse revenue streams – Asian tech is cushioned by diversity, as these companies drive revenue and earnings across multiple platforms and sectors. For example, advertising slumped on Tencent’s WeChat network, but its videogaming franchise surged during quarantines. Alibaba offset slumping consumer spending with rising demand for its cloud services.
5. Solid earnings growth expected – On the whole, the titans of Asian technology and online retail are expected to maintain significant sales and earnings momentum at a time when many other sectors are being hit with earnings downgrades.
2020 Consensus EPS and Sales Growth Estimates
|Company||EPS Growth (%)||Sales Growth (%)|
Source: Bloomberg. As at 23 July 2020. Future results are impossible to predict and actual results may differ materially. Estimates are based on certain assumptions which may not be correct.
Capital flows could provide a further tailwind
In March 2020, a flight to safety saw foreign investors withdraw US$78B from emerging markets11. The strength of the $US encouraged investors to remain confined to their home markets, where ample liquidity and low interest rates have since driven up S&P 500 index valuations.
In the absence of foreign investors, the strong recovery in Asian tech stocks was led by local investor buying activity and encouraged by Chinese state-sponsored media12. It wasn’t until June that foreign investors started to trickle back into Asian and emerging markets. Given how overbought U.S. equities appear to be, any $US weakness or further stabilisation of financial markets could see that trickle turn into a flood.
With the U.S. and emerging market countries like Brazil, India and Russia recording the highest confirmed COVID-19 cases globally to date, Asian tech stocks may be particularly well placed to be the beneficiaries of capital inflows seeking new growth opportunities.
How to get exposure
Investors looking for exposure to many of the companies that could be best positioned to benefit from long-term demographic trends and capitalise on the structural growth of the technology sector in Asia can consider the BetaShares Asian Technology Tigers ETF (ASX: ASIA). ASIA currently holds the 50 largest Asian technology companies (ex-Japan), including Tencent, Alibaba and Meituan Dianping.
From inception (18 September 2018) to 31 July 2020, ASIA has returned 27.8% p.a., and 28.2% over the six months to 31 July 202013.
There are risks associated with an investment in ASIA, including information technology risk, concentration risk, emerging markets risk and currency risk. For more information on risks and other features of ASIA, please see the Product Disclosure Statement, available at www.betashares.com.au.
Licensed adviser use only. Not for distribution to retail clients.
1. Strobaek, Michael, and Burkhard Varnholt. “A Year like No Other.” Credit Suisse – Investment Monthly, July 2020, p. 9.
2.“Global Economy Reopening Tracker | Insights.” Cushman & Wakefield, 13 July 2020, www.cushmanwakefield.com/en/insights/covid-19/global-economy-reopening-tracker.
3. Smith, Greg. “Meituan Dianping Thrives on Food Deliveries in Lockdown.” Australian Financial Review, 19 June 2020, www.afr.com/wealth/personal-finance/meituan-dianping-thrives-on-food-deliveries-in-lockdown-20200617-p553oa.
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8. “Internet Penetration in Asia-Pacific 2019.” Statista, www.statista.com/statistics/265153/number-of-internet-users-in-the-asia-pacific-region. Accessed 23 July 2020.
9. Godoy, Katelyn. “The Impact of E-Commerce: China versus the United States.” Cornell SC Johnson, 24 Feb. 2020, business.cornell.edu/hub/2020/02/18/impact-e-commerce-china-united-states.
10. “Tencent: Game-Changing Moves.” Seeking Alpha, seekingalpha.com/article/4359398-tencent-game-changing-moves. Accessed 21 July 2020.
11. Greene, Megan, “Investors are too complacent about emerging market risks.” Financial Times, 2 Jul. 2020, https://www.ft.com/content/4eb8203a-2440-41de-ab98-d6234d5511ae.
12. “Investment Monthly | APAC edition | A year like no other,” Credit Suisse AG, Jul. 2020.
13. Past performance is not indicative of future performance.