ASIAN emerging markets are embracing new technologies, and this represents significant opportunity for long-term investors. In this article, the Barclays Investment Solutions team take a look at what this means.
Technology is big business in Asia, where a digital revolution has disrupted a wide range of industries including banking, retail and manufacturing.
Whilst many of us might think of the US - home to giants such as Google, Facebook and Amazon - as the world’s tech leader, Asia has rapidly embraced new technologies too, with companies such as Alibaba and Tencent now also household names.
Technology, financials and industrials now make up more than 65 per cent of the overall emerging markets Asia index, making it less exposed to unpredictable movements in commodity prices compared to other emerging market regions.
Here, we explore some of the reasons why this area may be worth investing in as part of a well-diversified portfolio. Bear in mind, however, that an investment in Asian emerging markets definitely isn’t for the faint-hearted, and you could get back less than you put in.
Countries such as China, Korea, and Taiwan are often the dubbed ‘Asian tech tigers’ due to their success in manufacturing electronic components and devices. These countries typically benefit from a large and increasingly affluent pool of domestic consumers who are keen to take advantage of the latest technological innovations.
Just over a decade ago, for example, China accounted for less than 1 per cent of the global e-commerce market, but now this share has grown to over 40 per cent. As a percentage of total retail sales, e-commerce stands at 10 per cent in the US, compared to 15 per cent in China.
E-commerce is also big in South Korea, which is often seen as a bellwether for global trade and technology. A large proportion of the South Korean stock market’s growth can be attributed to tech giant Samsung Electronics, which accounts for around a fifth of the country’s exports. South Korea is also home to many other well-known tech companies such as memory chip supplier SK Hynix, and multinational electronics company LG Electronics.
Taiwan similarly has a reputation as a technological powerhouse, with the Taiwan Semiconductor Manufacturing Company the exclusive maker of iPhone processors.2
Investing in emerging Asian technology companies carries substantial risks as their stock prices can be quite volatile. Recent performance pays testament to this – technology stocks, the sector with the largest weighting in the MSCI Asia Pacific Index, slumped in April, with Samsung hit by setbacks, including delays to its first foldable smartphone.
Fears over trade protectionism are understandably weighing heavily on investors’ minds, particularly following the US decision in May to block Chinese telecoms company Huawei from buying US goods, although the company was subsequently granted a licence to purchase them until August 19. Given how integrated the Asian tech sector is with global supply chains, these technology companies are particularly vulnerable to rising trade protectionism.
The recent breakdown in US-China trade negotiations do not bode well for the prospects of an imminent trade deal between the two. Here, we may have to accept that trade uncertainty may cast a longer shadow over markets than originally hoped. Long-term investors however, can afford to ignore these short-term headline risks, and focus on the longer-term growth prospects offered by the sector, albeit that they have to accept that this may not materialise.
Furthermore, it’s important to note that Asian stock markets do not move in tandem with their developed counterparts. This provides some diversification benefits to investors who are willing to invest a proportion of their portfolio in the Asian tech sector, thus helping reduce the risk of their overall portfolios.
:: Jonathan Sloan is a director at Barclays Wealth and Investments NI
