A private bank CIO is optimistic about the investment case for Asian technology companies. Here are his reasons.

The following commentary on Asian technology firms as an investment area comes from Don Smith, chief investment officer at Brown Shipley, the UK-based private banking and wealth management house. The editors are pleased to share these views with readers; they don’t necessarily agree with all such contributors’ opinions and invite readers to respond. Email tom.burroughes@wealthbriefing.com

Fast-growing and highly profitable Asian tech firms present serious challenges to the dominance of Western household names. This begs the question: will the future belong to the likes of Amazon or Alibaba?
Investors everywhere should take note of the seemingly unrelenting rise of Asian technology firms –particularly those based in China. The world’s most populous nation is now the global leader in a wide range of technology segments, ranging from alternative energy to electric vehicle sales.

From Mumbai to Seoul, Asian technology companies are investing heavily in R&D – and increasingly reaping the rewards. The rapid growth of such firms is also having a marked impact on regional stock markets, where traditionally dominant players in sectors like energy, materials and resources are increasingly being replaced by tech firms.

The rise of ecommerce and alternative energy 

Today, roughly one in ten retail transactions worldwide takes place online, up from 7.4 per cent in 2015 and expected to reach 15.5 per cent by 2021. Over the same period, the value of such transactions is anticipated to rise from $1.5 trillion to nearly $5 trillion.

That growth is coming, first and foremost, from China – where online spending now outstrips the US and UK combined. China has also emerged as the global leader in electronic payments and sits atop the so-called “sharing economy” of peer-to-peer transactions. 

Despite increasing investor awareness of Chinese e-commerce giants like Alibaba, a basic assumption prevails that Asian tech companies remain minor league compared with US behemoths like Amazon and Google. But the speed with which Asian firms are catching up will soon make them impossible to ignore.

On the whole, US tech giants still largely come out on top for R&D spending. However, Huawei’s R&D budget is now greater than that of Apple, Oracle and Facebook, though it still lags Intel, Microsoft, Google and Amazon. 

By contrast, South Korea is the global leader in terms of R&D outlay as a proportion of GDP, with Samsung its standard-bearer.

In other tech-focused sectors, China leads the way in alternative solar and wind energy generation. At the end of 2016, the country accounted for 26% of worldwide installed solar energy capacity and 31 per cent of wind power. 

And it far outpaces other countries for sales of electric vehicles: in 2016, BYD Auto was the world’s top electric car manufacturer, with 102,000 units sold, compared to 76,000 for US-based Tesla. 
 

An emerging middle class 
China is already the world’s most-populous nation, while India will have four times as many inhabitants as the US by 2030. 

It is forecast that by 2020 half of the global middle class will be in emerging markets, rising to two-thirds by 2030. Putting this in perspective, it took 10 years for the emerging-market middle-class population to increase by 1 billion, but it could take just six years to add the next billion.

Importantly, the emerging middle class in Asia is different from that in the West: its members are much younger and more tech-savvy. 

Mobile services are more than just a convenience for this segment of the population. In remote regions of China or India, the nearest bank branch could be many kilometres away, so mobile applications make much more sense. 

Throughout emerging markets, many have grown up and gone about their business entirely through the use of mobile services.

Tech growth on Asian stock markets 
The rapid growth of tech companies is also having a spill-over effect on Asian stock markets, pushing out traditionally dominant players in sectors like energy, materials and resources.

It is now the biggest sector in the MSCI Emerging Markets index, representing 26 per cent of its total market capitalisation, with the financial and consumer discretionary sectors not far behind. Today, technology firms make up 36 per cent of the MSCI China index, compared with just 1 per cent in 2007. 

Amazon or Alibaba?
Yet the best of this Asian growth story is still to come – and comparing Amazon with Alibaba offers some insights. 

Alibaba was founded just a few years after Amazon. Whilst Amazon’s sales are five times larger than Alibaba’s, and its market cap about 12 per cent bigger, the quality of growth is very different. Alibaba may be dwarfed by Amazon when it comes to staff and revenues, but the Chinese firm’s operating margins are much higher, so its profits are of a different order of magnitude.

Alibaba is just one example of a fast-growing and highly profitable Asian tech firm that is rewriting the rules and seeking to conquer the global digital economy. 

Between December 2016 and August 2017, a weighted sample of Asian tech stocks comprising JD.com, Alibaba, Tencent and TSMC posted an average return of 71 per cent, compared with 37 per cent for the so-called FANG quartet (Facebook, Amazon, Netflix and Google/Alphabet) in the US. 

Across many emerging markets, technology is having a rapid and game changing impact. Such private sector growth is leading to structural change in economies and societies and investors would do well to take notice.