During a recent media briefing, the firm’s chief investment officer for Asia-Pacific and head of emerging markets, Sean Taylor, said technology stocks both globally and in Asian markets were driven by earnings.
However, Taylor said he was selective on the sector, particularly in Asia-Pacific. For example, Taylor liked internet stocks but was cautious on “Apple-chain” stocks.
“Examples of internet stocks are the Tencents and Alibabas, and we think they will continue to deliver on earnings growth,” he said.
For Apple-chain stocks, he said that these companies had become more reliant on the next Apple launch.
“Given their high valuations, we’re taking money off the table there. But we will look at them again in a couple of quarters when there are new Apple products coming out,” Taylor said.
From Fangs to Bats
For reference, Fangs are Facebook, Amazon, Netflix and Google, and Bats are Baidu, Alibaba, and Tencent.
Taylor said he also liked Asian internet companies because of lower valuations relative to US technology stocks.
“We’ve had a lot of crossover money basically from the Fangs, mainly Facebook, Amazon and Google, to Asian stocks because US equities have been expensive,” he said.
But Taylor expected Asia technology stocks to be a little more volatile next year, especially since they had increased a lot. These stocks helped drive the MSCI China Index, which was up 50% this year, he explained.
“There is obviously going to be profit-taking,” he said.
Alibaba and Tencent are widely held stocks in Asia-Pacific strategies. For example, 40 out of the 146 SFC-authorised Asia- and Asia-Pacific-focused funds have more than 3% of their assets in Alibaba, while 29 funds have more than 3% in Tencent.
For Deutsche AM, one of its Asia-focused strategies, the Deutsche Asia Premier Trust, has three of its top holdings invested in technology companies: Samsung Electronics (8.93%), Alibaba (7.49%) and Tencent (5.91%), according to the fund’s factsheet.
Like Taylor, Value Partners is also positive with tech stocks.
“Although Chinese e-commerce and internet firms record slower growth in their core businesses, the exponential growth from none-core business largely offsets the impact,” according to Value Partners Classic Fund fund manager, Frank Tsui.
However, other managers have less positive views of the sector. Joshua Crabb, head of Asian equities at Old Mutual Global Investors (OMGI), believes that while technology stocks remain attractive, investors should stay away from overcrowded trades.
“The market globally, and in particularly in Asia, has gotten very narrow around a couple of very large internet-based companies,” he said recently. These large cap companies, such as Tencent, are widely-held and have become very expensive.
“We don’t see a collapse in these stocks, but we just don’t see an upside,” Crabb said.
Blackrock’s Andrew Swan, head of Asian and global emerging market equities, is also cautious on the IT sector in Asia, in particular some e-commerce platforms in China and large-cap technology companies in Taiwan. He believes that there is a mismatch in the sector’s expanding P/E ratio and earnings growth.
Information technology in emerging markets has consistently outperformed the broader emerging markets, according to FE Analytics.
Over a three-year-period, the MSCI Emerging Markets Information Technology Index returned 77.22%, while the MSCI Emerging Markets returned 31.18%.
Three-year performance of the MSCI Emerging Markets Information Technology Index v MSCI Emerging Markets
Three-year performance of the Deutsche Asia Premier fund versus its benchmark
Source: FE Analytics, Note: All NAVs have been converted to US dollars for comparison purposes
