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Tokyo - For most of the past two decades, technology companies have been supporting players in Asian equity markets - rarely taking leadership roles during rallies and almost always ceding the spotlight to the region’s giant financial firms.
Not any more. As Asia’s benchmark stock index climbs to within a few points of its November 2007 peak, tech companies are jumping squarely onto centre stage.
Led by Tencent’s 2 636% surge over the past 10 years, tech has surpassed finance as the largest component of the MSCI Asia Pacific Index for the first time since the internet bubble burst in 2000. The industry is climbing twice as fast as its closest rival in Asia this year and has trounced gains among tech shares in the US and Europe.
The good news for investors: in aggregate, Asian tech companies are still cheaper than their global counterparts and trade at valuations below levels that foreshadowed previous bull-market peaks.
Buoyed by the success of Tencent’s WeChat messaging service, Alibaba’s e-commerce business and Samsung’s gadgets, the industry’s profits are projected to jump 30% to all-time highs in the next 12 months.
“Prices are high, but earnings are strong,” said Guillermo Felices, who helps oversee about $93bn as a London-based senior portfolio manager at BNP Paribas Asset Management. “I see it as a structural, secular story rather than a cyclical one. That’s very different from the situation in the late 1990s when we saw the dot-com bubble.”
The MSCI Asia Pacific Information Technology Index climbed 1.5% to a record at 5:11pm in Hong Kong. Tencent jumped 2.9%, the most in four weeks.
Optimism
Like their global peers, tech shares in Asia have surged on optimism that the sector will grab a bigger slice of traditional businesses from finance to retailing and health care. But Asia’s tech companies have also benefited from homegrown trends, most notably China’s efforts to increase the role of tech and service industries in its $11trn economy.
Tencent, which added more than $400bn of market value over the past decade, has been one of the largest beneficiaries of China’s shift.
While the Shenzhen-based firm still earns a big chunk of its profits from online games, much of the stock’s rally in recent years has been fuelled by expectations that a favourable policy environment in Beijing will help boost its still-nascent advertising and finance businesses - both of which target WeChat’s nearly one billion users.
Tencent is now the biggest stock by weighting in the MSCI Asia Pacific index, followed by Samsung, Alibaba and Taiwan Semiconductor Manufacturing. In 2007, none of the gauge’s top five companies were in the tech industry. Tencent ranked a lowly 221st.
Tech’s standout performance during the MSCI index’s current bull market, which started in February 2016, has also been a break from the past. The industry has tended to be a middling performer during rallies, ranking fourth or below during five of the past six Asia bull markets. This time it’s up 99%, outpacing the broader measure by about 50 percentage points.
Some worry that the outsized gains may not last. Any signs of disappointment from tech companies during the third-quarter earnings season could spur a short-term selloff, according to James Thom, a Singapore-based money manager at Aberdeen Standard Investments.
Still, Thom says the gains so far have been supported by strong profit growth and “reasonably constructive” valuations. The MSCI Asia Pacific tech index is priced at 16 times estimated earnings for the next 12 months, versus an average of 17 at peaks in the gauge over the past decade, data compiled by Bloomberg show. Benchmark tech indices in the US and Europe have multiples of 19 and 21, respectively.
“We’re still comfortable with valuations despite the rally,” said Andrew Gillan, the Singapore-based head of equities for Asia excluding Japan at Janus Henderson, which oversees about $345bn. “Investors outside the region underestimate the amount of innovation in Asia.”
While tech’s rise has been the most notable shift in Asia’s equity market over the past decade, it’s not the only one. The following charts highlight other trends since 2007.
Despite the rally in tech shares, MSCI’s Asia Pacific index has lagged behind the S&P 500 over the past decade. The US equity gauge is now more than 60% higher than its pre-financial crisis peak.
A big reason for Asia’s underperformance is the slump in “old economy” industries like energy and raw materials. Authorities in China, the region’s biggest economy, have been trying to shift away from those businesses as they seek a more sustainable growth model.
In Asia, it has paid to be small over the past decade. Benchmark equity indexes in Pakistan, Sri Lanka and the Philippines have led regional gains, while China has been the biggest laggard as the nation’s old-economy shares slumped.
* Fin24's parent company Media24 is part of the Naspers Group. Naspers owns a 34% stake in Tencent.
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