Q1. What are the megatrends in the digital revolution?
 

• With technology (tech) revolutionising almost every aspect of our daily lives, investors are navigating the world of digital ubiquity. While disruption driven by a tech revolution is constant, the global public health crisis has accelerated the structural changes that were already underway.
  
  
• Globally, tech is at the dawn of a new era, a number of mega trends that could create tailwinds for tech-enabled sectors over the long term have emerged - cloud computing, artificial intelligence (AI), autonomous cars, 5G and many more.
  
  
• In the more developed markets, like in the US or Europe, digital transformation could be defined by AI and machine learning. The ability to gather and harness data is accelerating, and this could allow technology and AI to enter and reshape every single industry. As an example, AI is currently used for fraud detection in the financial industry, and is increasingly being used to assess lending quality and credit risk.
  
  
• In Asia, import substitution demand has emerged as one of key growth drivers for the tech space supported by favourable demographics, improving research and development (R&D) and innovation capabilities. This is fueling rapid transformation and industry consolidation in various verticals in software, hardware, consumer-related businesses and even healthcare. For instance, with cutting-edge R&D and production, many Asian tech leaders have become key players at every step in today’s global tech hardware ecosystem. These leaders are also well-recognised, high-quality global leaders that are continuously gaining market share.



Megatrends in tech¹



Source: Shutterstock, J.P. Morgan Asset Management. Provided for information only to illustrate generic market trends, not to be construed as research or investment advice.
 

Q2. What are the future trends in healthcare?
 

• Technology and the global public health emergency are also reshaping the future of the healthcare sector. Generally, healthcare innovation is associated with medicine such as creation of new drugs or new surgical techniques.
  
  
• But the crisis has accelerated some innovations in healthcare services, such as health management data analytical tools and digital consultation tools. Research and development in this sector are ongoing.
  
  
• Demand for telemedicine, which helps doctors and patients stay connected and reduce the administrative costs of care, will likely continue to rise.  Equally, we see robust growing trends in remote monitoring techniques that could help prevent further deterioration of patients with chronic conditions.
   

Q3. How is the digital revolution transforming Asia?
 

• These megatrends are happening at various stages in the region. Among the potential opportunities, digital transformation is a relatively attractive sector at the moment. The digital revolution, in our view, has only just begun despite a rapid growth rate.
  
  
• Enterprise software is still a relatively new concept in Asia, as companies are still familiarising themselves with terms like “ERP”, “SaaS” and “PaaS” ². Many markets are still in the early stage in terms of adoption. For example, the Chinese public cloud market size is estimated to reach US$22.2 billion this year, accounting for only about 9% of the expected world’s market size³. Meanwhile, contrary to common belief that Japan is a key area of innovation, Japanese corporates are still relatively slow in software adoption. As they tackle the fallout from the global public health crisis, companies are starting to be more receptive to cloud-based operations. We believe under Prime Minister Yoshihide Suga’s leadership, any favourable policy implementation in “Suganomics” could be a strong tailwind for Japan’s digital transformation.
   

e-commerce penetration in Asia⁴



Source: Company data. J.P. Morgan Asset Management. Data as of end-August 2020. For illustrative purposes only. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated. Provided for information only to illustrate generic market trends, not to be construed as research or investment advice.

• On the consumer side, while we saw rapid growth and strong penetration in eCommerce for markets like China and Korea, eCommerce penetration in some member states in the Association of Southeast Asian Nations (ASEAN) grouping is still far behind, representing vast growth potential.
  
  
• While conventional perception may point some investors towards powerhouses such as the US and Europe, Asia’s technological prowess should not be overlooked. Benefiting from the aforementioned tailwinds, some Asian champions have emerged, not only as the best within the region but also globally. Semiconductors is one example where there are only three companies in the world that can produce cutting-edge chips, and two of them are from Asia.

Q4. How important is environmental, social and governance (ESG) for tech investing?
 

• Our robust ESG-integrated investment process could help investors, depending on their investment objectives and risk appetite, select the types of businesses that could offer potential returns and positive social impact in the long run.
  
  
• Meanwhile, sustainable investing has become more relevant than ever before amid the health crisis and discussions around social issues and climate change. Moreover, new growth sectors triggered by the mega trends such as electric vehicle are tilted towards ESG issues, which are appealing to new generations of ESG-conscious consumers and investors.
  
  
• Furthermore, with increasing attention on corporate governance and shareholder returns, there is a growing trend of tech companies paying out relatively attractive dividends⁵, showcasing that investing in tech is not only about growth but also income.
   

Q5. Is a repeat of the tech bubble likely?
 

• In the US, the tech sector covers a relatively higher share in the S&P 500 Index⁶, compared with other regions, and the rally of tech stocks since March 2020 have led the US markets higher. Meanwhile in Asia, with China being one of the first economies to recover, we have seen a strong surge from a wide range of tech companies, such as eCommerce, gaming and enterprise software.
  
  
• With valuations at current levels, a pivotal question is whether the recent upcycle of tech companies could be the repeat of the tech bubble seen in 1998 through 2000.
  
  
• Using the MSCI AC Asia Pacific IT Index as a proxy, from the perspectives of trailing earnings-per-share (EPS), price-to-earnings (P/E) and return-on-equity (ROE) ratios, we believe the fundamentals of the sector are currently relatively healthy⁷. Compared to the tech bubble with sky-high multiples, investors currently are generally driven by earnings growth, rather than valuations. They are also investing in companies with stronger and better growth perspectives.
  
  

Current upcycle vs tech bubble⁷

MSCI AC Asia Pacific Information Technology Index (sources of total return breakdown in US dollars)



Past performance is not indicative of future performance. 

• In our view, taking a long-term view on the tech sector is key. This requires open-minded capabilities and the ability to identify the companies that could offer better growth potentials, given the many tech sub-sectors.
  
  
• In the short-term, geopolitical uncertainties remain a key source of volatility. It is crucial to keep sight of the fundamentals. Times like these could accelerate industry consolidation in certain sectors, and the higher-quality companies, especially the market leaders, could be beneficiaries. It is difficult to navigate the tough times, but often the strong would likely emerge stronger.

Conclusion

To ride the wave for future growth, it is critical to identify an enduring growth franchise instead of focusing on certain economies, or looking to time the market. Focusing on the mega trends, alongside an active approach, could help long-term investors better capture quality opportunities.

Provided for information only based on market conditions as of date of publication, not to be construed as investment recommendation or advice. Forecasts/ estimates may or may not come to pass.

1. Source: Shutterstock, J.P. Morgan Asset Management. Provided for information only to illustrate generic market trends, not to be construed as research or investment advice.
2. ERP stands for enterprise resource planning; SaaS stands for software as a service; PaaS stands for platform as a service.
3. Source: Frost & Sullivan, Gartner, Bernstein analysis, J.P. Morgan Asset Management. Data as of 31.08.2020 or most recently. Forecast numbers reflect the estimated data in 2020. For illustrative purposes only. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated. Provided for information only to illustrate generic market trends, not to be construed as research or investment advice.
4. Source: Company data. J.P. Morgan Asset Management. Data as of end-August 2020. For illustrative purposes only. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated. Provided for information only to illustrate generic market trends, not to be construed as research or investment advice.
5. Dividend rate is not guaranteed. Past performance is not indicative of future performance.
6. Source: S&P Global Ratings, FTSE Russell, MSCI. Data as of 31.08.2020. Information technology represented 28.7% of the S&P 500 Index, 16.9% of the MSCI AC Asia Pacific ex Japan Index and 0.9% of the FTSE 100 Index.
7. Source: Bloomberg. J.P. Morgan Asset Management. Data as of end August 2020. Forecasts, projections and other forward looking statements are based upon current beliefs and expectations. They are for illustrative purposes only and serve as an indication of what may occur. Given the inherent uncertainties and risks associated with forecast, projections or other forward statements, actual events, results or performance may differ materially from those reflected or contemplated. The companies/securities above are shown for illustrative purposes only. Their inclusion should not be interpreted as a recommendation to buy or sell. J.P. Morgan Asset Management may or may not hold positions on behalf of its clients in any or all of the aforementioned securities. Provided for information only to illustrate generic market trends, not to be construed as research or investment advice. Indices do not include fees or operating expenses and are not available for actual investment.

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