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Friendly regulation and a new economic system are opening Asia up to exciting tech innovations
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Regulation opens the gates to fintech in Asia
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fintech
Content from: Wellington
Widespread tech innovation
What’s so new about the new economy?
new economy
How are investors allocating in the tech sector?
risk and opportunities
Top 10 performing sectors during Covid-19
top 10 sectors
A multidecade journey of massive disruption
Images credit: Unsplash, Adobe Stock, Getty Images
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Disruptive technology themes and ESG
FINTECH
Fintech was called one of the ‘enormous competitive threats’ banks face by JPMorgan Chase chairman and CEO Jamie Dimon in April. From loans and payment systems to investing, Dimon says fintech companies have done a great job in developing easy-to-use, intuitive, fast and smart products, which is why ‘banks are playing an increasingly smaller role in the financial system’. For fintech companies, that must feel like a hole in one. Their raison d’etre is to disrupt financial services' status quo. Having shaken things up in other parts of the world, they are now doing so in Asia. ‘Fintech in Asia is on the cusp of where it was in Europe and the UK in 2011,’ says Nigel Verdon, CEO and cofounder of Railsbank. 'The initial drive was the 2007 and 2008 credit crunch, combined with regulatory change and infrastructure, like Amazon Web Services starting to appear, which meant costs dropped dramatically. That created a perfect storm for fintech. ‘In Asia, the regulatory changes are only just happening. They’re opening up and allowing lightweight licenses such as e-money in the UK and Europe, which allow people to send and receive money electronically.
by Neil Johnson
Asia’s e-potential
‘This is expected to lower fees for investors,’ says Endowus CEO Gregory Van. 'The likely rise in investor numbers will drive industry players to reconsider their own processes. They will now have to pay more attention not just to their product offerings, but also to the customer’s digital experience. Penetration could be slow initially, but with lowered fees acting as a carrot, there is only one direction it can go. ‘Central banks are also focusing on developing digital-only banking solutions. Singapore and Malaysia, for example, have issued digibank licenses. Traditional financial institutions are also trying to launch their own fintech solutions, serving fintechs as services rather than trying to block fintechs from thriving. It is an exciting time for the industry and consumers alike, with a lot more disruption to come.' Endowus recently had a first close in its Series A financing, with Lightspeed Venture Partners and SoftBank Ventures Asia investing more than $17m in the firm’s first external raise. ‘We have been approached by private equity firms, family offices, financial institutions, multinational corporations and more with interest in Endowus,' Van says. 'There is a lot of interest in the evolution of financial services. Many companies will try and die, but those that breakthrough will define the future.’
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Daryl Liew, CIO at REYL Singapore, notes that investments in Asian fintech companies are currently mainly limited to private equity and venture capital. ‘Ant Group would have been the first major Asian pureplay fintech company to list, but its listing was suspended last year by the Chinese regulators.’ Citi Private Bank achieves fintech exposure via its global and regional financial services funds, whether in the traditional or alternative space. ‘Some funds have broad mandates with an allocation to the financial sector, where you can find fintech names (global equity/multi-thematic funds),’ says Julie Koo, managing director and head of Citi Investment Management's proprietary and advisory sales in Asia Pacific. 'Others more directly target fintech developments (tech funds and innovation funds). One of our key global technology funds has exposure to fintech via payment names such as PayPal, Alibaba (Alipay), DocuSign, Tencent, Visa and MasterCard.' Over the last decade, fintech firm revenues have grown at a double-digit annualised rate. Revenue at S&P 500 companies has been lower. ‘It is our expectation that fintech will continue to experience strong growth now that this industry has reached a tipping point. We think this growth can drive stock prices as well as the valuations of privately held fintech players,’ says Koo. ‘Fintech firms come in many shapes and sizes, from fairly recent start-ups to giant tech companies that are moving into financial services. We see the most attractive potential in the payments space. At the same time, we are closely monitoring traditional providers’ response to fintech. Our aim is to reduce or avoid exposure to the most susceptible. Further and wider ranging fintech disruption is coming. Investors should log on to this unstoppable trend sooner rather than later.’
crosshead
Using technology to make manual processes more accurate and hassle-free at lower cost and tremendous scale translates to a revolution in fintech. It began with payments and brokerage, but is now moving to traditionally more value-added services such as wealth management. Companies such as digital adviser Endowus have made inroads into wealth management, particularly in incorporating pension funds emanating from Singapore and Hong Kong’s Mandatory Provident Fund (MPF). In January, authorities appointed an operator to run the proposed electronic MPF (eMPF) system that aims to streamline, standardise and automate existing processes.
The tipping point for fintech in Asia is near, and there’s a breadth of opportunities
‘One thing that's still lacking in Southeast Asia is a decent size fintech business outside of China. There isn't a Wise or a Revolut, so there’s the opportunity for somebody to develop that.’ With centres of innovation popping up in China, Hong Kong, Singapore, Indonesia, India and Australia, perhaps the tipping point is on the horizon. Douglas Wolfson, director of market planning at LexisNexis Risk Solutions, says Asia has reasonably low barriers to entry and a nearly endless raft of opportunities. ‘Any idea has a chance if investors believe it can be monetised. While entities that want to play in the financial space might need licenses, regulators have generally accepted challengers outside of the banking sector,' he says. While there may not be egregious barriers to entry, fintech will struggle with the region being split into a variety of market maturity stages. ‘The social disparity and economic fragmentation between these individual markets often causes difficulties for fintech-solution providers operating in the region, particularly for those looking to serve multiple markets,’ says Nagesh Devata, Asia-Pacific vice president and head of enterprise at digital payment platform Payoneer. ‘Understanding the nuanced needs of these markets is vital to ensure users are served the correct suite of products. Multi-jurisdiction compliance that keeps up with the ever-changing regulatory landscape in Asia, customer support that is as local and diverse as the regions’ customer base, and diverse product sets that have value for both micro-SMEs in emerging markets and mature enterprises in the developed markets will all help to drive inclusion in the region.’
CONTENT BY
But the tech sector’s strong recent performance has some investors asking, ‘are we too late?’. In our view, the answer is ‘no’ and the innovation trend continues to offer a long-term secular opportunity. Though areas of the market currently have elevated valuations and the growth curves for some innovations may have accelerated or even plateaued, we think there is still a long runway for growth ahead.
Widespread tech innovation: Don’t miss the forest for the really big tree
A long runway for growth
Digging deeper to find hidden opportunities
In our new video, we explored the technologies behind the coffee bean, highlighting innovations such as farmers harnessing cutting-edge sensors in their soil to power new data insights from AI, and consumers using advanced digital payment methods to purchase a cup of coffee. Innovation has far-reaching impacts on consumers, businesses, and society as it creates opportunities for everything from the raw materials up through the supply chain to a technology’s numerous end markets.
Tech well-covered: Beyond the headlines
Electric vehicles There are several high-profile electric vehicle (EV) chains that are rapidly growing. But competition is heating up from many other companies, including established automakers transitioning from combustion engines to EVs. This is a long-term secular trend that is highly likely to persist while having an important impact on the environment and society as a whole. However, with elevated valuations, many investors are wondering how to access the opportunity it presents. The hidden opportunity: While the market focuses on the automakers, we’re more interested in the massive demand they’re driving for the numerous components these cars will require (Figure 1). For example, by 2030, electronics are likely to be 45% of total car cost. [4] Regardless of who wins the EV war, we believe the companies supplying the picks and shovels of innovation – the companies mining nickel for batteries, the advanced chip manufacturers, and the AI firms, among many others — will likely continue to have a growing market for their products, including broader use cases beyond EVs.
For professional, institutional, or accredited investors only. This material and its contents are current at the time of writing and may not be reproduced or distributed in whole or in part, for any purpose, without the express written consent of Wellington Management. This material is not intended to constitute investment advice or an offer to sell, or the solicitation of an offer to purchase, shares or other securities. Investors should always obtain and read an up-to-date investment services description or prospectus before deciding whether to appoint an investment manager or to invest in a fund. The views expressed are those of the authors as of the date of publication and are subject to change without notice. Individual portfolio management teams may hold different views and may make different investment decisions for different clients. Investing involves risk and an investment may lose value. All investors should consider the risks that may impact their capital, before investing. Concentration risk is the risk of amplified losses that may occur from having a large percentage of your investments in a particular security, issuer, industry, or country. The investments may move in the same direction in reaction to the conditions of the industries, sectors, countries, and regions of investment, and a single security or issuer could have a significant impact on a portfolio’s risk and returns. Investments in emerging and frontier countries may present risks such as changes in currency exchange rates; less-liquid markets and less available information; less government supervision of exchanges, brokers, and issuers; increased social, economic, and political uncertainty; and greater price volatility. In Hong Kong, this material is provided to you by Wellington Management Hong Kong Limited (WM Hong Kong), a corporation licensed by the Securities and Futures Commission to conduct Type 1 (dealing in securities), Type 2 (dealing in futures contracts), Type 4 (advising on securities), and Type 9 (asset management) regulated activities, on the basis that you are a Professional Investor as defined in the Securities and Futures Ordinance. By accepting this material you acknowledge and agree that this material is provided for your use only and that you will not distribute or otherwise make this material available to any person. Wellington Investment Management (Shanghai) Limited is a wholly-owned entity and subsidiary of WM Hong Kong. In Singapore, this material is provided for your use only by Wellington Management Singapore Pte Ltd (WM Singapore) (Registration Number 201415544E). WM Singapore is regulated by the Monetary Authority of Singapore under a Capital Markets Services Licence to conduct fund management activities and is an exempt financial adviser. By accepting this material you represent that you are a non-retail investor and that you will not copy, distribute or otherwise make this material available to any person. ©2021 Wellington Management Company LLP. All rights reserved.
Yash Patodia, portfolio manager Anita Killian, CFA, portfolio manager Bruce Glazer, portfolio manager Michael Masdea, portfolio manager Brian Barbetta, portfolio manager
We are on the cusp of the next big tech wave and, in our view, we’re all poised to benefit. Innovation is constantly improving the lives of people across the globe, transforming our homes, schools, businesses and daily lives. From digital payments helping to make finance more accessible, to the cloud and the Internet of things (IoT) boosting efficiency everywhere, from farms to factories, to artificial intelligence solving problems from auto-safety to disease diagnosis – the world’s progress is grounded in innovation.
We’re at the beginning of a multi-decade journey of massive disruption and we see opportunities for investors to access the tech driving this innovation.
Tech innovations like digital payments, AI, the IoT, the cloud, and digital transformation are still early-stage, in our view, and are disrupting every segment of the economy, extending beyond technology and healthcare. We believe traditional exposures to technology are too focused on big tech names and lack the research depth to capture the full investment opportunity in the years to come. As the world rapidly changes, we think investors’ tech exposure should evolve along with it.
We believe the key to accessing these opportunities is to take a targeted, active approach to try to identify the potential winners and losers of long-term structural innovation trends across industries. We harness our deep and broad research resources to discover underlying opportunities hidden beneath the surface of well-known tech names. In our view, this helps avoid trying to pick the winners of a megatrend and instead looks to invest in the many potential winners across the supply chain. As supply chains become more integrated, particularly in Asia, companies have many different end markets. For instance, microprocessors used to sell into one industry, but they now fuel countless other sectors. Critically, we think many investors are missing the full opportunity of the firms powering these long-term themes. Below are three examples of areas where some investors worry the market is overly exuberant, but that we think continue to have robust growth opportunities beyond the headlines.
Automation The rise of automation is often thought of in terms of factories replacing workers with more productive robots. After all, the world is not growing as fast as it once was – and we need innovation to offset the slowdown. But the opportunity this technology offers stretches far beyond factories and robotics. The hidden opportunity: Even the headline trend of automation increasing productivity has numerous underlying themes, including machine vision, 5G, the cloud, and AI to capture, transmit, store, and analyse an exploding amount of data. These opportunities are powered by many small companies across the globe, requiring investors to have substantial regional and industry expertise. But automation is also increasingly enhancing decision-making, adding convenience and efficiency to myriad consumers and businesses. Entertainment companies use AI to improve customer content choices, insurance firms automate their customer service, and advertisers use machine learning to automate customer engagement decisions, among many other examples. In fact, it’s estimated that AI has the potential to add up to US$5.8 trillion in yearly value to 19 industries (Figure 2). [5]
Ecommerce The long-term growth of ecommerce has brought increased convenience and accessibility to new markets, companies, and customers – something that the COVID-19 pandemic has brought into greater focus. Some may think that we are in the late stages of this disruption and the opportunity has passed. But, in our view, there are still many areas for ecommerce to grow. The hidden opportunity: Areas like grocery delivery, digital payments (Figure 2), and sustainable packaging are still very early in their growth curves. For example, grocery delivery grew by 43% in 2020 but still has less than 50% market penetration. [6] This growth was powered by demand that was orders of magnitude higher than companies had seen prior to the pandemic, offering them the scale to invest in this area. In some countries, like China, the community group buying model is expanding the market to previously untapped populations with community leaders buying in bulk and then distributing goods to the community. [7] In addition, the companies enabling the cloud and digital transformation continue to have significant room to grow as ecommerce reaches new sectors and segments of society.
Source: McKinsey & Company, “Notes from the AI Frontier,” 2018. | These estimates combine the value creation potential of various AI techniques across nine business functions and 19 industries. This analysis also shows what percentage that potential value represents of the overall value creation potential from analytics broadly. For illustrative purposes only. Actual results may vary from forward looking estimates.
In our view, the key to investing in the long-term secular themes driving tech and innovation is to look beyond the hype and the news flows. We cannot stress enough the need to dig deeper into fundamentals and understand ‘the trends beyond the trends’ that can sustain growth for the long term. We think investors need the depth and breadth of research to harness the opportunities innovation creates beyond the traditional ‘innovative’ sectors. Tech progress has marched on through the pandemic, trade wars, and economic cycles. This pervasive innovation continues to disrupt industries and drive growth while, in our view, making the world a safer, more efficient, increasingly equitable, and overall better place. We believe the question should not be ‘Have we missed it?’ but rather ‘What’s next in innovation?’ and ‘How do we capture that growth?’.
Bottom line
about the authors
Anita Killian, CFA Portfolio Manager Anita has over 30 years’ experience investing in the technology sector, with a specific focus on the semiconductor and IT hardware industries. Yash Patodia Portfolio Manager Yash has over 10 years’ experience covering the technology sector, specializing in the software and internet sectors Bruce Glazer Portfolio Manager Bruce has over 25 years’ investment experience in the technology and business service sectors, with specialisms in the analysis of transaction and information processing and information technology professional services. Michael Masdea Portfolio Manager Michael has over 20 years’ experience in following industries characterized by rapid change and disruption. He is also the head of Wellington’s Investment Science Group. Brian Barbetta Portfolio Manager Brian has been covering the technology sector for over 10 years and has particular focus on internet and video game software companies, undertaking research and managing investments across both public and private equities.
1 Sources: Company reports, Wellington Management. Data as of 31 December 2020. 2 International Energy Agency, 2021. 3 Source: STiR Coffee and Tea International, September 2018. 4 Sources: IHS, Deloitte Analysis. 5 Source: McKinsey & Company, “Notes from the AI Frontier,” 2018. 6 Source: eMarketer, March 2021. Penetration in online grocery is defined as consumers who have used it at least one time, meaning there is even more potential for growth within the existing market. 7 Source: Pandaily, “Why is the Community Group Buying Model Surging in China?,” December 2020.
To access yet more insights and opportunities in the tech and innovation sector, please visit Wellington’s tech and innovation page or contact a member of Wellington’s distribution team.
‘We believe traditional exposures to technology are too focused on big tech names and lack the research depth to capture the full investment opportunity in the years to come’
The digital economy is at the start of development, and it could take years before the global economy gets to pre-pandemic GDP levels. Given this backdrop, which economies are well positioned to up their tech game, and which sectors will benefit the most? John Woods, managing director and Asia Pacific chief investment officer at Credit Suisse, sets the details in an interview with Citywire Asia editor Audrey Raj. Woods believes those best placed to recover quickest from the virus will benefit first. ‘The fiscal stimulus and expenditure package, particularly in the US but also in Europe, is important in this regard,’ he says, adding that China is also an economy to watch.
by audrey raj, editor
Never before has the pace of innovation been so rapid – or the reach of technology so great. Tech innovations like digital payments, artificial intelligence, the Internet of Things, the cloud and digital transformation are increasingly disrupting every segment of the economy. They remain early stage. A multidecade journey of massive disruption lies ahead, posing opportunities for those investors who harness the expertise of a fund manager with deep resources and global reach.
For professional and accredited investor use only.
NEW ECONOMY
A Harvard Business Review headline from 1993 asked: ‘What’s so new about the new economy?’ So where do we stand now, nearly 30 years later? In an era when automation, artificial intelligence, machine learning, 5G, electric vehicles, biotechnology and renewable energy are transforming industries and daily life, perhaps we can confidently reply: ‘This feels pretty new!’ As an investment buzzword rooted in early internet companies’ promises to transform the world, investing in the new economy has changed little. ‘New economy companies are ones disrupting the status quo, typically through the adoption of new technology,’ says Daryl Liew, CIO at Reyl Singapore. ‘The products and services provided by these new economy companies either improve end-users’ lives or create entirely new businesses that did not previously exist.’
High-tech bets
Within the new economy theme, Reyl invests directly in listed Asian companies, mainly those in the e-commerce, gaming and health technology sectors. As is the case when investing in companies involved in new businesses, performance can be varied, with hits and misses, says Liew. Over the last year, most of Reyl’s new economy stocks have outperformed the MXAPJ benchmark. Singapore-based gaming and e-commerce company Sea has been the best performer (370%), followed by China’s super-app service platform Meituan Dianping (188%). While leading Chinese health technology company Ping An Good Doctor has been a laggard (0.8%), the wealth manager remains positive about its long-term growth prospects. Patrick Ho, CIO of North Asia, private banking and wealth management at HSBC, holds a constructive view on the bank’s high-conviction themes: 5G, digital consumer, automation and healthcare innovation. This view is in part driven by initiatives in China’s five-year plan, as well as post-pandemic 5G and automation investment in the US and the EU.
We see the unstoppable trend of digitisation as likely to long outlive the next generation of internet delivery and be one of the key drivers of the new economy
China’s 5G network infrastructure is about to reach the stage where business applications could take off, buoyed by the plan, which has various initiatives to support biotechnology, automation, 5G and e-commerce. ‘Despite the overhang of short-term sector rotation out from new economy stocks to cyclical sectors, we continue to think these new economy themes remain a structural top trend for 2021 and beyond,’ Ho says. Another advocate of the wireless revolution, Julie Koo, managing director and head of Citi Investment Management's proprietary and advisory sales in Asia Pacific, expects 5G will help bring about an age of hyperconnectivity. To access this trend, Citi recommends portfolio exposure to its enablers and other beneficiaries, with 2021 pivotal as full-scale rollout begins. ‘New wireless technologies will enable a large increase in connected devices, with a vast acceleration in data produced,' Koo says. 'We seek investment opportunities among near-term beneficiaries, including those involved in the rollout of 5G. We also favour longer-term beneficiaries in areas such as autonomous driving, telemedicine and smart cities. ‘Like the telegraph, the telephone and dial-up internet, 5G is simply the next step in a centuries-long process that has dramatically improved communications across borders and geographies. It is with that framework in mind that we look forward to the benefits of the 5G rollout, but we see the wider unstoppable trend of digitisation as likely to long outlive the next generation of internet delivery, and be one of the key drivers of the new economy.’ Healthcare was already experiencing tech disruption prior to the pandemic. ‘With the risks around face-to-face meetings, an opportunity has opened for general practitioners to adopt innovative practices, such as online booking services, telemedicine, faster diagnosis, online prescriptions and dispensary services,’ Ho says. ‘Moreover, innovations such as gene-editing tools, mRNA-related novel manipulations and other cell technologies are seeing breakthroughs, and have the potential to lead to new applications and hence new long-term revenue streams.’
The future for innovative technology is bright, if a little fraught. Technological innovation has become a key battleground in China and the US. ‘Most Chinese new economy firms focus on domestic demand and are less sensitive to US policy,' Koo says. 'Ultimately, US-China competition would require two technology standards to be set up, while many others may need to adapt to both standards. This would require more total investment than if there was collaboration. This outlook would favour firms that provide the building blocks of software and hardware when both countries are investing into their own standards.' The likelihood, then, of the emergence of two rival internets and different technology platforms that overlap in selected markets globally is increasing. ‘Despite US efforts to cut China off from US technology, we believe that, over time, China could find alternative sources. The US currently has a chokehold in semiconductor chip design and fabrication equipment. This will remain a huge advantage in the age of 5G, and create significant issues for China’s advances in areas from high-end smartphones to its space-exploration program.’ In the coming decade, however, the US advantage here may fade. ‘Advances in modern computing have been about shrinking the size of silicon-based transistors so more can fit on ever smaller chips, as posited in Moore’s Law. But further increases in density will run into limits in the coming decade. ‘Further gains in computing power will thus require alternatives, such as quantum computing, extremely strong and thin graphene, or energy-conserving nanomagnets. Both China and the US have already made early progress in quantum computing technology, which has become a priority in China’s $2tn 2025 technology investment plan. These technologies are still in their infancy, which may level the playing field between the G2 powers in the future.’
The G2 battleground
Disrupting new technologies and the digitisation of existing systems are the structural top trends for 2021
Julie Koo, Citi Investment Management
RISK AND OPPORTUNITIES
Tech has been and continues to be a fairly sizeable part of our conviction list allocation. But our picks, for the US markets in particular, are mostly mature tech or blue-chip tech. E-commerce is a case in point. Its growth is well-established and well-entrenched in American society, but it is still growing rapidly, especially internationally. It should continue to do so. And so stocks in this space have been a no-brainer pick for years. The electric vehicle (EV) industry is less represented in our picks as the technology is still quite new, and profitability is still a question for related companies. For every one that becomes successful, there are others that should never have raised one dollar from investors. For a long time we have been recommending some car companies that have recently announced commitments to EV development. When blue-chip companies legitimise a technology, these ‘safe’ stocks can really take off, as we have seen in these cases. The same can be said for automation. Many blue-chip tech stocks that are ubiquitous in our daily lives are calls of ours that have invested in this space as well. For us, it’s less about finding the first company with a new technology – it’s about finding the best.
Five experts share their views on the opportunities and risks in electric vehicles, automation and e-commerce investments
Ryan Landolt Senior equities advisor Indosuez Wealth Management Hong Kong
Hou Wey Fook Chief investment officer DBS Bank Singapore
DBS’ chief investment office has great confidence in the global technology space. In the flagship DBS CIO Barbell Portfolio, technology-related equity exposure accounts for about 30% of securities. On a subsegmental basis, we believe the EV, automation and e-commerce industries have strong growth potential. EV is one of the fastest growing industries globally, and the market is expected to expand at a compound annual growth rate of 20% to reach $800bn by 2027. As governments around the world work towards net-zero emissions, we expect more incentives encouraging EV adoption to come onstream. This will drive more investment into different segments of the industry, ranging from automakers to infrastructure and raw materials suppliers. The combination of lower cost and wider availability of choices creates a positive virtuous cycle for the industry. However, in the short term, the industry faces headwinds from a potential shortage of raw materials, ranging from nickel to semiconductor chips. Automation holds the key to cost reduction and productivity enhancement. Given the headwinds of rising wages and ageing populations, manufacturers are shifting towards automation and Industry 4.0, where the adoption of data and analytics, collaborative robots and 3D printing is creating the fourth industrial revolution. We see great potential in industrial robot manufacturers, cloud service providers and big data analytics companies. The pandemic has accelerated the global adoption of e-commerce, boosting its share of global retail sales dramatically. The e-commerce space is less susceptible to short-term economic jolts and will remain a long-term winner in our Barbell Portfolio. Regarding opportunities, we see huge potential in regions with strong e-commerce growth, in particular the large emerging economies of Asia.
Henry Hon Executive director EFG Bank Hong Kong
There have been several headline stories in the Chinese new economy sector recently. The most notable was about how the State Administration for Market Regulation had concluded an anti-monopoly investigation into Alibaba with a fine of RMB18.2bn ($2.8bn). The outcome could have been worse as the Chinese antitrust fines can be as high as 10% of annual sales. Based on Bloomberg’s estimated numbers for 2021, it will take Alibaba less than two months to finance this bill through free cashflow. It is reasonable to say the worst is behind Alibaba. However, for the rest of China’s internet players, we expect to see another round of anti-monopoly fines to be concluded in the near term. From a valuation perspective, most of China’s internet names are trading at slightly attractive to reasonable levels, with limited downside. As for electric vehicles, it is a high-beta theme to ride during the bull market. In a blue-sky scenario, one could value an electric vehicle business in a valuation metric such as price-to-unit sold. This is no longer the case under the current market sentiment. For instance, Baidu started a joint venture with Geely in early 2021. It plans to roll out its first electric vehicle no later than 2024. Within the new economy sector, we prefer tech giants with a solid earnings outlook over loss-making names, whereas the market has somewhat priced in further regulation risk.
Julie Koo Head of Citi Investment Management sales, Asia Pacific Citi Private Bank Hong Kong
We are investing in technology through dedicated regional and global technology funds, as well as funds with exposure to technology drivers in other unstoppable trends such as healthcare, energy transition, consumption and the rise of Asia. We are likely to see high earnings growth in artificial intelligence, 5G, cybersecurity, biotech, online healthcare, renewable energy and electric vehicles in the coming decade. This growth will be defined by the ability of companies and industries to not only generate strong demand growth through innovation with technology but also business models. For example, the full-scale rollout of 5G wireless data networks will begin in 2021, which will help bring about an age of hyperconnectivity across many different sectors. New wireless technologies will enable a large increase in connected devices, with a vast acceleration in data produced. This provides investment opportunities among near-term beneficiaries, including those involved in the rollout of 5G but also some of the longer-term beneficiaries in areas such as autonomous driving, telemedicine and smart cities. We recommend investors seek portfolio exposure to innovators as well as its enablers and beneficiaries. One risk for investors to consider may be the reopening from Covid-19 restrictions, which might reduce the amount of time and money devoted to online consumption. Another risk can be the impact of a rise in interest rates, which may reduce the present value of future earnings growth. We have seen both of these play out in recent months. But they are likely to be short-term issues, while longer-term growth trends for technology remain intact.
Grace Tam Chief investment advisor, Hong Kong BNP Paribas Wealth Management Hong Kong
We expect an acceleration in EV adoption driven by stricter emission norms, government bans on internal combustion engine (ICE) cars, aggressive EV model rollouts, and improved competitiveness against ICE cars in terms of cost and performance. EV penetration, which stood at 11.5% in 2020, is expected to rise to 34% by 2025 and 62% by 2030. We are still early in the EV investment theme. Opportunities are not only limited to EV automakers, but also to EV component makers, EV semiconductor companies and lithium miners (rechargeable lithium-ion batteries are largely what enables EV uptake). Regarding e-commerce in China, regulatory risk will continue to weigh, but it is increasingly being priced in. Regulatory oversight will set the ground for an even more competitive playing field, and will be beneficial for tier-two players within the industry. E-commerce names are mostly inexpensive, but they will be undergoing an investment phase as major players battle it out in the e-groceries space. Upcoming quarterly result announcements may lead to some volatility due to moderation in margins and heavier investments to solidify long-term growth. But they will potentially create excellent entry points for medium- and long-term investors. As to key risks, some of the EV-related stocks’ valuations are very high, which may not be justified by the companies’ business fundamentals. Also, technology is still being developed. Companies may not be able to deliver satisfactory earnings results if the technology’s commercialisation takes longer than expected. Therefore, the selection of good quality companies is key in playing this theme.
Six of the 10 best-performing sectors during the 12 months following the Covid-19 market crash were within thematic equity sectors. Clean energy topped the chart as the best performer, recording 126% and netting $16.6bn in inflows during that period. This was followed by basic industries at 105% and natural resources at 91%. However, inflows indicate that investors were more drawn to the natural resources sector, which attracted $10.7bn, compared to $3.8bn for basic industries. Interestingly, the Taiwan small and medium-sized companies sector slightly outperformed the technology sector, recording 82% and 80% respectively. Nevertheless, the latter is still a bigger favourite among investors, who pumped in $118.7bn in assets.
Thematics dominate top 10 performing sectors during Covid-19
Equity - Clean Energy
126%
$16.6bn
Equity - Basic Industries
$3.8bn
105%
Equity - Natural Resources
$10.7bn
91%
Equity - Sweden Small & Medium Companies
$103.0bn
85%
Equity - Taiwan Small & Medium Companies
$0.2bn
82%
Equity - US Small & Medium Companies
$512.6bn
87%
Equity - Technology
$118.7bn
80%
Equity - Robotics & AI
$18.0bn
78%
Equity - Taiwan
$10.6bn
77%
Equity - Energy
$8.4bn
Sector name
Asset inflows
The analysis takes into consideration the Citywire’s division of sectors. All the calculations are performed in the currency used by Citywire for the global peer group in the relevant sector. The data only included funds that were available at both the end of March 2020 and the end of March 2021 on the Citywire’s database.
TOTAL RETURN
Which disruptive technology themes will offer the highest returns and how much does ESG matter for better performance? Patrick Pei, chief investment strategist at Hywin Wealth Management, tells Citywire Asia editor Audrey Raj.
Drivers of disruption
INTERVIEW
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