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Investing in Asia’s tech tigers

03 July 2019

3 minute read

Asian emerging markets are embracing new technologies. Here, we look at potential opportunities for investors in these ‘tech tigers’.

Who's it for? All investors

The value of investments can fall as well as rise and you could get back less than you invest. If you’re not sure about investing, seek professional independent advice.

What you’ll learn:

  • How technological innovation is boosting growth in Asia.
  • What the risks of investing in emerging markets are.
  • How to gain exposure to Asia’s tech tigers.

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% 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.

A new hotbed of innovation

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% of the global e-commerce market, but now this share has grown to over 40%. As a percentage of total retail sales, e-commerce stands at 10% in the US, compared to 15% in China.1

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

Understanding the risks

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.3

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 19.4 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.

Ways to gain exposure

There are several funds that focus on Asia, enabling investors to gain exposure to some of the biggest technology companies there.

These include the Fidelity Asia fund, the Janus Henderson Asian Dividend Income fund and the Stewart Investors Asia Pacific Leaders fund. Bear in mind that our referring to these funds doesn’t constitute a personal recommendation to invest in these, or any other investment.

If you’re investing overseas, you’ll also need to factor in currency risk. For example, if sterling weakens, this will boost your returns from foreign investments, and conversely if the pound starts to strengthen your returns may fall.

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