AI-related opportunities arising in Asia
The Asia growth and investment story is compelling, with Japan, India, Taiwan, and South Korea set to benefit from the region’s positive macro-economic and investment dynamics.
The region also offers investors the opportunity to benefit from the new AI-driven hardware investment cycle in Asia. Stocks like SK Hynix Inc., Samsung, and Taiwan Semiconductor Manufacturing Company Limited are set to benefit from growth in AI-related products and the AI revolution.
Why Asia?
Asia matters because it is home to roughly 60% of the global population, is an integral part of global supply chains, and benefits from megatrends like AI and automation. With a young population and growing middle class, it has significant consumption tailwinds.
From a portfolio standpoint, Asia serves as a valuable diversifier, offering another source of returns not tied to the fortunes of other regions, such as the US. The countries that exhibit significant potential are:
• JAPAN: We are slowly seeing a return of inflation and positive interest rates supporting domestically-orientated companies. Corporate governance reforms are gaining momentum, a crucial change from an investment perspective.
• INDIA: Favourable demographics and economic policy reforms show the world’s fifth-largest economy is in a favourable position to translate strong economic growth into solid earnings and equity market returns
• TAIWAN AND SOUTH KOREA: Both markets have high weightings in the technology sector, and the markets are set to be key beneficiaries of AI.
• CHINA: The People’s Bank of China has recently announced new stimulus packages. What the market and investors are really looking for from China is not only a sizeable package of stimulus measures to aid the ailing economy but also to win back foreign investor trust and rebuild consumer sentiment.
One of China's biggest problems is that Chinese consumers are more interested in saving than spending. A deep, long-term economic issue in China is overproduction across industries relative to domestic consumption.
We believe China’s economic future is still uncertain, with considerable challenges to overcome before a sustainable growth trajectory will be restored. However, the latest round of stimulus measures implies that the authorities are serious about surmounting these challenges.
Accessing Asian investment opportunities
We capture the Asia Growth story on behalf of our clients by allocating a portion of their portfolio’s equity component to an Active Asian manager, Veritas Asia. They have a bottom-up investment approach, informed by a thematic overlay, and aim to find high-quality companies in industries with long-term structural growth, such as Consumer, Healthcare, Tech, and companies that will benefit from Asian green growth trends.
Opportunities/themes coming through include Asia’s positive positioning as a home to a host of AI infrastructure enablers. From 2010 to 2020, the software and service technology global boom saw companies benefitting from the likes of Google, Amazon, Microsoft, and Meta. Similarly, platform companies like Alibaba and Tencent did very well in Asia. During this period, investment went into software services and applications and flows into tech hardware slowed down. Tech hardware suffered a structural downward trend (falling prices) as PC upgrades slowed and the smart phone replacement cycle lengthened.
With an AI revolution now underway, a new hardware investment cycle has begun. Our active Asian manager believes that the coming tech cycle in AI capex could benefit the Asian tech hardware sector. For investors, Asian AI-related hardware companies offer the benefit of cheap valuations, robust cash flow generation, and healthy balance sheets that will allow them to reinvest to take advantage of the rising AI demand. The Asian AI-related technology and hardware companies offer an alternative to the US, with similar exposure to structural growth opportunities but at significant discounts.
