Investing in the digital future
When investors think about global tech investments, they likely think of oligopolies and a fistful of acronyms. The well-known tech titans have indeed transformed our lives, and grown the digital economy’s share of GDP. Yet this is only the beginning.
The global pandemic has been a catalyst: technological self-sufficiency is now a strategic geopolitical necessity rather than just a desirable economic competitive advantage. Innovations in AI and leaps in computer power are allowing rapid digital development, and companies with superior fundamental quality and strong margin power are positioning themselves to win market share in a difficult environment and recover stronger when economic conditions improve.
As the world adapts to ever-evolving economic, geopolitical and pandemic challenges, the long-term outlook for the digital transformation trend is a positive one.
An epicentre of tech innovation
After leading the boom in consumer electronics in the 1980s, Asia is now turning into an epicentre of tech innovation for the new age of digital transformation. The region accounts for over half of the world’s population1, which is increasingly digitally native. For the last decade, Asia has accounted for more than half of global growth in technology company revenues, 43 per cent of start-up funding, 51 per cent of R&I spending, as well as 87 per cent of patent filings.2
“As the global economic gravity shifts to the region over the next decade, technology will be at the heart of this evolution,” explains James Cheo, Chief Investment Officer, Southeast Asia, for HSBC Global Private Banking and Wealth.
“This will be buoyed by three elements: the rise of the Asian digital consumer; increasing manufacturing prowess – built on robotics, automation and powered by 5G and the internet of things; and the development of the technology needed to fuel the green transition from electric vehicles to batteries, as well as renewable energy, such as wind and solar equipment.”
Ecommerce revenue in Asia is projected to reach USD2.1 trillion in 2022, compared with USD986 billion in the US.3 Three of the top ten tech companies by market capitalisation are from the region.4 And when it comes to unicorns, those firms valued over USD1 billion, China has 28.5 per cent of the global total and India 5 per cent, while the US has nearly half5 – indicating there is still room for growth.
A global growth opportunity
All indications point to a systemic digitalisation of economic sectors and technological innovation, buoyed by increasing purchasing power.
“It helps that Asia has learned a lot of lessons from the West,” Cheo notes. “In time, lessons learned in Asia will be applied to what happens in the West. Technological innovation will also increasingly be buoyed by the Asian consumer.”
Indeed, this cohort is expected to account for half of all global consumption growth in the next decade, opening up the possibility of a USD10 trillion opportunity.6
Whether it’s online advertising or shopping, the metaverse or 5G smartphone adoption, technology markets in many economies in Asia are still evolving. Venture capital firms have already been ramping up investments in Southeast Asia due to the growing consumer adoption of digital platforms since the pandemic, which has fuelled start-ups across many sectors. ASEAN, the 10-country bloc with more than 660 million people, has the third largest population in the world and a GDP of USD3.2 trillion.7
“Global supply chain diversification, realignment and regionalisation is a big theme right now for private investors, especially with technology manufacture. ASEAN as a region is set to benefit from this; it is a new battleground for firms. It is also repeating the China model that kicked off 20 years ago, which started off as a place to locate production and then quickly evolved into one of domestic consumption,” says Frank Lee, Managing Director, Head of Asia Technology Research at HSBC.
“The busiest people right now are the venture capitalists. They’re seven or eight years ahead of public markets. Right now, they are spending a lot of time looking for investments – particularly in ASEAN. Naturally, once you get to a certain scale, the capital markets will feed into this, and you will get bigger IPOs and listings as companies increase in size, and then this opens up opportunities for private banking clients.”
Although Asia still relies on imported inputs for its core technologies, more than 90 per cent of the world’s smartphones are already made in the region.8 It is a hotbed of innovation, capacity and consumption, aiming to become a leader in the metaverse and the required infrastructure, as well as making the latest devices and equipment affordable.
Riding the green transition
The transition to a greener global economy is another theme for investor focus. The energy shift to more renewable power sources and mobility solutions – most of which is technology dependent – is only getting started worldwide. Asia already has a strong electric vehicle manufacturing ecosystem; Japan and South Korea are leaders in battery innovation, which is crucial to net zero transportation. It helps that there is strong government support across Asia for these industries. On the demand side, electricity consumption in Southeast Asia alone is projected to double by 2040.9
“The whole energy transition is a focus right now,” says Cheo. “We will also see exponential growth in investments for renewables such as wind and solar, driven by China and India, since they have the world’s largest populations and significant land mass.
“At the same time, the likes of Japan and South Korea are looking at green hydrogen technology. These are still early days, but if we see significant innovation and breakthroughs, these innovations could be scaled not just across Asia but the rest of the world.”
Certainly, for private investors, the aim is to consider the long-term outlook for technology on a global scale. In a global and Asia-specific context the trend of greater digital transformation of economies and adoption of technological and data-led innovations is robust and structural in nature. The direction of travel is only going one way.
“Investors should position themselves to take advantage of these long-term trends,” Cheo notes. “That said, it’s still early days for some of these technologies, and there will surely be bumps along the way. It’s therefore good to take a diversified and portfolio approach to investments, picking a mix of companies that are strong within these themes.”
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1 World Population Prospects 2022, UN Department of Economic and Social Affairs ↩
2 What is driving Asia's technological rise? McKinsey Global Institute, January 2021 ↩
3 Statista, accessed 5 August 2022 ↩
4 companiesmarketcap.com, accessed 5 August 2022 ↩
5 Hurun Global Unicorn Index 2021 ↩
6 Meet your future Asian consumer, McKinsey & Co, July 2021 ↩
7 East-West Center, 2021↩
8 What is driving Asia's technological rise? McKinsey Global Institute, January 2021 ↩
9 Southeast Asia Energy Outlook 2019, International Energy Agency ↩