Fed Up With the FAANGS? Global Investing Ideas Outside of the US Tech Sector
Although America’s technology giants have attracted the headlines and enjoyed strong share price performance in recent years, there may be some reluctance by investors to jump on their bandwagon at this stage. This note outlines a few other global investment ideas that also seem to offer good long-term potential.
Asian Tech Tigers
Outside of Silicon Valley, some investors may be surprised to know that Asia also has a thriving tech sector, and in several respects, China is already ahead of the U.S. in terms of technology use.
China had 772 million internet users as at end-2017, for example, or more than twice as many as in the U.S. What’s more, 20% of Chinese retail spending was transacted online last year, compared to only 10% in the U.S. And 40% of online payments in China were made via a mobile phone, compared to only 15% in the U.S.
It’s perhaps not surprising, therefore, that Asia is home to four of the 10 largest technology companies in the world. China-based Alibaba, for example, is now the world’s largest retailer, with its sales and profits surpassing that of all U.S. retailers (including Walmart, Amazon and eBay) combined since 2015. Baidu, meanwhile, runs China’s most popular search engine, far surpassing Google in terms of market share. And Ten cent runs China’s most popular social networking sites, far exceeding the reach of Facebook.
The demand outlook for Asian technology remains strong. According to one study by Google and Temasek Holdings, South East Asia’s internet transactions – covering online bookings, gaming and retail spending – are forecast to grow at a compound annual rate of 20% over the 10-years to 2025, reaching almost $US200 billion. Online retail spending alone is expected to grow at an annual rate of 32% p.a., reaching $US88 billion over this period.
ROBOTS & AI
Another interesting global opportunity is robotics and artificial intelligence (A.I). Indeed, contrary to fears that “robots will take our jobs”, the reality is that the global economy faces labour shortfalls in coming years due to both population ageing and declining birth rates.
Together with rapid technological advances, this is creating opportunities for the deployment of labour-saving robotic devices in a widening array of industries. A.I. takes these advances even further, by effectively teaching robots to teach themselves, and thereby enabling them to undertake tasks of ever greater complexity.
Some estimates suggest, for example, that one-quarter of U.S. manufacturing operations will be automated by 2025, up from only around 10% today. The U.S. Army also estimates robots could provide a 25% reduction in the required size of combat teams by 2030. Robots are also assisting in delicate surgeries and round the clock care demands for the elderly and sick.
According to Tactical Research, the global robotics industry is forecast to enjoy compound annual growth of 32% between 2017 and 2025, while A.I. revenues are projected to grow at a compound rate of 56.8%p.a.
Although there has been great focus on the strong US economy and gains in US-based technology shares in recent years, it may also surprise some investors to know that Japanese corporate performance has been just as strong as that of the United States over recent years.
Despite a sluggish local economy, Japanese companies have been able to punch out good earnings due to both solid global trade, and an increasing management focus on converting export sales success into improved shareholder returns. This has been implemented by focusing not just on growing sales but improving profit margins and earnings per share through a tighter control over costs and excess cash on their balance sheets.
What’s more, Japanese companies have benefited from a generally stronger US dollar (weaker Yen) in recent years as it has improved both exporter competitiveness and boosted the local currency value of offshore earnings. The preference for a generally weaker than stronger currency among Japanese officials suggests that hedging currency exposure when investing in the Japanese equity market can make sense.
With US interest rates continuing to rise, and a very easy money policy being maintained by the Bank of Japan, the Yen seems likely to remain soft over the coming year, which should further support Japanese equities (especially on a currency-hedged basis).
The Benefits of Global Diversification
Given the relatively low exposure of Australia’s share market to technology companies, it makes sense for Australian investors to consider a tech edge when considering international diversification.
Investors interested in the above themes might consider the following:
Beta Shares Asia Technology Tigers ETF (ASX code: ASIA).
Beta Shares Global Robotics and Artificial Intelligence ETF (ASX Code: RBTZ).
Beta Shares Wisdom Tree Japan ETF – Currency Hedged (ASX Code: HJPN).
Both the RBTZ and ASIA ETFs appear well placed to help investors tap into the anticipated growth in Asia tech spending and global investment in robotics and artificial intelligence in the coming years. The HJPN ETF also provides handy diversification given that the Japanese economy is quite different to that of Australia and Japanese management finally appear to be focusing on returns to shareholders.
David Bassanese, Chief Economist, Beta Shares