Our Company and Sites
August 2018

Going global with technology:
Focus on EM Asia

Christopher Dhanraj
Director
Head of ETF Investment Strategy

Key points

  • Technology sector performance has been very strong for the last couple of years. Investors tend to focus on the key U.S. companies, but technology, of course, is a global industry. One region where investors can access important tech firms is in emerging markets (EM) in Asia.
  • We remain constructive on both technology and EM Asia. We expect continued double-digit earnings growth in both areas, and believe tech valuations are reasonable while EM Asia looks cheap.
  • We see secular trends supporting long-term opportunities in both markets, and encourage investors to consider an industry-level approach to technology investing that spans software, hardware, and semiconductors.
  • Rising CAPEX globally by tech firms could add an additional cyclical catalyst supporting technology firms and export-focused countries such as China, Korea, and Taiwan, in our view.

Going global: Asia is the (new) home of technology

Tech has been on a tear for the last couple of years. However, after a strong earnings-driven rally, investor focus has shifted to regulatory and concentration risks.

Technology is a global industry with key firms around the globe. A region that is arguably underappreciated as a tech center offering potential opportunities for investors is emerging Asia. We believe a number of countries in the region, namely China, Korea, and Taiwan, are particularly well positioned to benefit from their growing tech industries.

With concentration risks top of mind, we believe investors should reexamine the full breadth of tech exposures available, including global opportunities. In fact, China, Korea, and Taiwan offer exposure across the full breadth of tech industries, including software, hardware, and semiconductors. (See Figure 1).

Figure 1: Emerging Asia is the (emerging) home of technology

Technology industry weights


Technology industry weights

Semiconductor manufacturer sales


Semiconductor manufacturer sales

Technology industry weights


Technology industry weights

Semiconductor manufacturer sales


Semiconductor manufacturer sales

Source: Thomson Reuters, Semiconductor Industry Association. Data as of July 30, 2018. Notes: The left chart measures the index weight of technology industries. Indices include the S&P 500, MSCI Emerging Markets Index, MSCI Emerging Markets Asia Index, MSCI China Index, MSCI Korea 25/50 Index, MSCI Taiwan 25/50 Index. The right chart measures the market share of semiconductor manufacturing sales by region.

Tech outlook

Technology remains our most favored sector. Valuations are reasonable, in our view, given strong revenue and earnings growth, positive earnings momentum, and a favorable broad-based earnings revision ratio.1 The long-term opportunities currently appear equally compelling. Despite industry growth outpacing peers, tech adoption remains nascent and has yet to fully revolutionize many non-tech industries. The long-term implications are potentially significant.

The backbone and future of tech rests on semiconductors. Every year more chips are needed to power a larger number of devices while end user markets have broadened to include autos, communications, computers, and the internet of things. Semiconductor sales have grown more than 20% year-over-year for several years now, yet the adoption of artificial intelligence and big data analytics by non-tech firms will only further drive demand for chips and semiconductor memory technologies, in our view.2 EM Asia should benefit disproportionately from these secular trends. As figure 1 shows, EM Asia accounts for over 60% of manufacturing sales, and Taiwan’s capital markets are particularly well positioned to benefit from growing semiconductor demand.

Technology is also seeing an outsized cyclical uplift. Capital expenditures are rising overall globally but are heavily skewed towards technology. This could provide an added cyclical catalyst to technology and export-focused countries in Asia, where exports follow CAPEX closely. Positive CAPEX spillovers can be seen in rising new orders for computing, communication, consumer, and industrial equipment. The Markit PMI new orders subcomponent for global technology manufacturing companies shows a broad-based rise in global demand for tech-related equipment.

Figure 2: Rising CAPEX offers broad support to technology equipment

Global technology CAPEX


Global technology CAPEX

Global tech firms, new orders


Global tech firms, new orders

Global technology CAPEX


Global technology CAPEX

Global tech firms, new orders


Global tech firms, new orders

Source: BlackRock Investment Institute, Thomson Reuters, Markit. Data as of July 30, 2018. Note: The left chart shows the year-over-year growth in capital expenditures (CAPEX) on a trailing 12-month basis for the technology sector within the MSCI All Country World Index. The right chart shows the new orders subcomponent of the Markit purchasing manager index. A value above / (below) 50 indicates expansion / (contraction) in new orders from global technology firms.

Summary

We remain constructive on technology in the near term due to strong revenue and earnings growth, and believe many of the secular trends supporting the sector have only begun to materialize. In EM Asia, despite rising trade tensions, we see attractive risk/reward potential due to strong earnings, attractive valuations against peers and EM Asia’s own history, and favorable tech exposure. Investors shouldn’t limit their thinking to just U.S. markets: Tech has gone global, and investors may want to consider doing the same, in our view.