This article first appeared in the Financial Review on 18 May 2023
The escalation of US-China tensions over the last few years is well known to investors, and nowhere does this play out more than in the tech sector. If the US-Russia Cold War decades ago is defined as a ‘space race’, these US-China tensions look to be playing out as a ‘tech race’.
Geopolitical conflict, sanctions, and negative news flow are a great recipe to create market jitters, and the tech sector is front and centre of this.
So, what does that mean for investors in Asia?
Investors would heed well to remember that ‘Asia tech’ is far reaching across the region, and for active investors there are plenty of opportunities to be found.
Consider Korea and Taiwan, both highly regarded in the manufacture of technology hardware globally, particularly in semiconductors - a component of the tech cycle that might be the ‘new oil’ for future industries. The next generation of smartphones, high powered computers and electric vehicles is reliant on semiconductors, and the long-term structural demand is clear.
Pre-pandemic, one area of concern for investors in Korea and Taiwan technology stocks was the threat of cheaper alternatives. The targeted sanctions have largely put a stop to this, and
Korean and Taiwanese semiconductor firms are enjoying an improved competitive environment as international companies consider implications of their supply chain decisions.
The obvious next question is can we anticipate the rise of new US tech hardware giants? Quite simply, cost is a problem and for a new kid to enter the block, deep pockets are needed, and it doesn’t guarantee success against long-established market leaders.
There are other factors at play. Technology is a capital-intensive business and establishing scale and investing in R&D is essential to stay ahead. Over the years the largest and best managed firms have outperformed their peers, and in memory and microchips we now have clear global leaders in the likes of SK Hynix, Samsung Electronics and TSMC.
In an industry where the strongest stay strong, the long-term future looks bright. Yes, there are short-term cycles to contest with, but short-term concerns over things like inventory, means you can buy long-term winners at attractive valuations.
Beyond technology, where are opportunities to be found in Asia for investors willing to look beyond the noise?
Mainland China relaxed it’s zero COVID policy late last year and the path to recovery is set. While it’s likely to be bumpy, there are plenty of opportunities to be found.
Take Focus Media for example, a digital advertising screen display firm with the lion’s market share in its field across cities in China. Following a broad decrease in advertising spend in 2022, companies want to rebuild their brands. With the success of streaming, digital advertising screens in elevators, shopping malls and cinemas are an increasingly popular way to reach a broad cross-section of consumers, spending pent up savings.
And despite (or because of) the noise, there are opportunities to be found in the out of favour property sector. China introduced a "Three Red Lines" property policy in 2020 that set out measures aimed at preventing excessive debt in the property sector. Companies are required to meet stricter liquidity requirements to obtain finance from banks or other financial institutions.
While the long-term aspirations to reduce debt in the system is clear, in the short-term we saw a rise in unfinished projects, a slump in the property market and rising unpaid invoices for building materials suppliers - with investors quickly losing confidence in the sector.
However, with a rapidly evolving industry, certain companies stand to benefit. Companies with large cash reserves and strong balance sheets, such as Beijing Oriental Yuhong Waterproofing, are seeing their market share rapidly increase because they have been able to weather recent uncertainties. As the property sector recovers, a firm like this can grab a bigger piece of the pie- less competition often means more pricing power.
The market backdrop in Asia fluxes continuously and news of change is usually met with a negative reaction. Can you find money making ideas in Asia amid a changing landscape? Absolutely. But a laser focus on understanding industry structures, the underlying businesses, assessing the value of the company and being nimble enough to react is essential.
