Asia is too large for global investors to ignore. It has been the engine of global growth for the past two decades and now accounts for a third of the world’s GDP. This momentum has been fuelled by significant investments in the technology sector.
Many young companies have become best-in-class local champions and unique investment opportunities. Southeast Asia is entering a digital golden age and its internet economy is expected to jump tenfold to USD 1 trillion by 2030 from USD 100 billion in 2020, according to Bain, Temasek and Google. New consumer-facing tech investment opportunities are emerging thanks to the structural shift to digital in Japan, South Korea and Taiwan, traditionally homes to well-established semiconductor and “hard” tech firms. Despite tighter regulations for consumer-facing tech companies, China’s goal of self-sufficiency and leadership in the tech space may continue to drive opportunities in cloud software and artificial intelligence for businesses.
Asia tech has the potential to provide strong diversification for investors seeking good returns on equity, given the robust structural growth outlook over the coming 3–5 years. This thematic is at an inflection point, with its indices starting to perform better against the NASDAQ in 2022 after significant underperformances in 2021. Macro conditions in the region are becoming more supportive, with Asia’s GDP growth (4.5%) outpacing global growth (3.1%). The regulatory environment in China has tightened for consumer-facing tech, but intensity has peaked and long-term growth remains intact for companies with high barriers to entry.
Today, Asia is a fertile ground for e-commerce, 5G, EV batteries, online gaming, semiconductors, and other promising new technologies, such as artificial intelligence. In the coming years, the digital economy in Asia will continue to grow significantly, driven by rapid shifts in consumer behaviour.
There are four key promising areas to consider:
- Enterprise digitalisation: Businesses’ spending on technology in Asia will keep outpacing the rest of the world, driven by a lack of penetration and the ongoing Covid-19 pandemic. Companies’ tech spending is projected to reach USD 1.8 trillion in 2025. Firms’ shifting to SaaS (software-as-a-service) is a global trend, but Asia is still in the starting blocks. Artificial intelligence technologies are becoming scalable, affordable and adaptable for a wide range of business applications through SaaS.
- Consumption shift: In 2020, the Asian e-commerce market was already three times larger than that of the US and four times larger than that of Europe. And yet the region is set to continue to grow by 50% in the next five years, faster than any other region in the world. Online penetration continues to rise strongly and there is a lack of established offline retail options in less-developed markets.
- Lifestyle evolution: Asian consumers are quickly shifting to a digital lifestyle as internet connectivity and income levels rise. The continent already leads the world in digital wallet take-up (these accounted for 40% of all payments in 2020). In addition, the sharing economy is taking off and is expected to grow at a compound annual growth rate of about 24% in the future. Asia is also home to unique social networks and messaging platforms with strong user engagement and long-term monetisation potential. Platforms, hardware and software facilitators of Asia consumers’ shift to a digital lifestyle, such as food delivery, ride-hailing and digital payments, are also of interest. Last, we are considering vertical-focused online services that are leveraged to rising income levels in Asia, such as travel and rentals.
- Entertainment innovation: Per capita spending on gaming in Asia is twice as high as in the US or Europe. Moreover, innovative digital entertainment formats developed in Asia, such as short videos or free-to-play games, tend to be widely adopted by global markets. To date, nine of the top ten mobile games in the world are published by Asian developers. Innovative digital entertainment platforms, such as live streaming, are in nascent and high-growth phases. Companies with the key building blocks to execute and benefit from virtual reality and the metaverse are also showing potential.
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Vey-Sern Ling