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Asia tech fever

The investment case for Asia tech remains strong as the region's companies benefit from structural support, according to JP Morgan Asset Management.
Oliver Cox, JP Morgan Asset Management

Despite the recent surge in technology share prices, Oliver Cox, fund manager at JP Morgan Asset Management, is unperturbed by the corresponding rise in valuations, and resists comparisons with the dot com bubble at the turn of the century.

He points to the “ubiquity of technology” today, and the higher quality and maturity of tech companies now.

“When you think of their importance to our every day lives, it’s reasonable that these are now the biggest, most dominant companies,” Cox told FSA.

“The rise of the middle class and the younger generation across Asia will continue to fuel consumer demand for better quality products and services and drive innovation,” he said.

Cox manages the $319m JP Morgan Pacific Technology Fund, whose top holdings include Taiwan Semiconductor Manufacturing (TSMC), Alibaba, Samsung Electronics and Kingdee International Software.

It has posted a 149.8% five year cumulative return, compared with an average of 148.2% by its rival TMT funds available to Hog Kong retail investors, according to FE Fundinfo data. So far this year, it is up 59%, compared with 50.4% for the sector average.

Cox highlights two segments that have been beneficiaries of government support in Asia and have seen their growth trajectories accelerate since the Covid-19 outbreak earlier this year.

These are internet-based businesses, such as enterprise software, gaming and ecommerce, and in-sourcing providers of hardware, such as semiconductors and smartphone components.

“While we have seen solid growth in these areas in the past few years, penetration rate is still relatively low. With accelerated demand due to Covid, the market leaders are gaining market share throughout the region,”, told FSA.

Moreover, during the tech boom two decades ago, a lot of the returns came from re-rating and not a lot of earnings growth, and valuation levels were much higher at about 120 times earnings compared with 18 times earnings now, according to Cox.

“So while we would not say these companies are cheap at today’s levels, they are much more reasonable and sustainable given the better and more solid growth outlook for the sector,” he said.

Nevertheless, the Asian technology sector’s rise has not been uninterrupted.

It suffered its worst year in 2018 for a decade, as the Chinese authorities imposed restrictions on the gaming sector amid concerns about its effects on the country’s youth, the outlook for global smartphones deteriorated and worsening China-US trade tensions caused a delay in IT capex decisions and raised concerns about supply-chain management.

The downturn also hurt Cox’s fund, especially in the second half of the year, with a full-year loss of 26.75% compared with an average 9.51% decline by tech funds available to Hong Kong retail investors, according to FE Fundinfo.

Chinese internet/gaming names were among the top detractors, with Tencent impacted by tighter regulations, Alibaba and Baidu suffered as fear of tariffs and further economic slowdown weighed on internet advertising demand, and Samsung declined due to investors’ concerns about the extent of the slowdown on memory semiconductor earnings, according to Cox.

Future trends

Although geopolitical tensions and a resurgence of the global coronavirus pandemic are future risks to markets, Cox believes that “investing in stocks, especially in technology, is about fundamentals”.

For instance, “Tencent, Alibaba and TSMC have continued to outperform the broad MSCI Apac index by a significant margin in spite of constant noise around geopolitics,” he said.

Cox also expects the spate of Asia tech IPOs, both within region and on other exchanges, will continue, and thereby provide new opportunities.

“History shows that the “winners-take-all” phenomenon has been very apparent in the tech space, which illustrates the case for investors to stick with the leaders,” he said

“However, as the investible universe expands, many of these new companies will be challengers and disruptors.”

For example, with the government policy support, Cox thinks there is great potential in China’s EV markets, with recent surveys showing that the more tech-savvy, environmentally conscious young generation are expected to be the key demand growth drivers.

Asia tech giants are not just dominant in their regional markets, they are increasingly global leaders. Many Asia tech leaders are outperforming global peers by significant margins due to favourable demographics and ever-improving R&D, for instance Alibaba has outperformed Amazon over the long term, according to Cox.

“Correlations between Asia’s tech sector and global tech have been creeping up in recent years, given closely-linked supply chain dynamics,” said Cox.

“Even with rapid R&D advancement in China and trade tensions, it’s hard to see total decoupling in the near-term. Yet, an increasing drive to self-sufficiency is a trend to watch in China tech,” he added.

JP Morgan Pacific Technology Fund vs sector average

Part of the Mark Allen Group.