Investment opportunities in Asia tech and AI-related stocks

Asia technology stocks have experienced diverging performance in 2023 with artificial intelligence (AI) related stocks outperforming strongly after the surge in the use of generative AI made popular by applications like ChatGPT. However, non-AI related technology stocks such as those related to smartphones, PCs, consumer electronics and autos have been facing an uphill battle mainly due to sluggish end-demand.

Asia Pacific spending on AI including software, services, and hardware for AI-centric systems is expected to grow to US $78.4 billion in 2027, according to the latest report by the International Data Corporation (IDC).¹ The growing emphasis companies are placing on using the latest technology to reimagine operations, enhance customer experiences and maintain their competitive edge in a changing marketplace are the main drivers for this growth. The IDC forecasts a compound annual growth rate for AI spending of 25.5% for the period from 2022 to 2027.

Given the interest in AI, earlier this year we saw valuations in tech hardware exporters such as the Taiwanese semiconductor chip heavyweight and the world-dominant South Korean memory chipmaker rise. Although nascent, an expected revival in chip demand also enabled the Taiex and Kospi indices, which are heavily weighted to technology shares, to be among the highest performers in Asia in 2023.

In China, big tech players and startups are investing heavily in AI as these firms aim to rival their American counterparts. This is despite US sanctions on China’s access to advanced chips that are required to run AI models. More recently as of late October, one Chinese big tech and AI behemoth announced that their large language model has caught up to GPT-4 (the latest ChatGPT model).² The research firm Forrester has also stated that China will outpace the rest of the world on AI software spend and plans to delegate US $16.6 billion, or 21% of its software spend, to AI by 2025.³

We believe increasing demand of higher computing power to power generative-AI applications will continue to be structural, disrupting how we undergo our lives and work. However, the market has built substantial expectations into share prices of related stocks along the value-chain, as reflected by rerated valuations.

The challenge remains with the cost and supply of high-powered computing chips and related computing infrastructure that are required to power these AI-models, and which applications would become profitable and can come out on top. We are still early in this trend to have a definitive answer.

Investment implications

With the broader technology sector having experienced an extended downturn cycle, there is an opportunity to narrow the underperformance against the AI-related group of tech stocks in the short-term. Inventory levels in DRAMs, smartphones and other tech components are back to healthier levels and valuations are at attractive levels.

In the AI space, we like to relook at direct and indirect plays when valuations revert to more reasonable levels, especially in Taiwan and Korea. We think Taiwan tech companies that are exposed to the server business and foundries that help to manufacture high-end GPU chipsets could be beneficiaries. Korean tech stocks that are exposed to high-performance DRAM could also benefit from this uptrend. In China, we like to focus on companies that are building AI models, especially companies that have access to a large volume of data from their existing internet platform businesses.

With contributions from Monica Uttam, Thought Leadership and Insights, Asia Pacific

Investment risks

The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested.

When investing in less developed countries, you should be prepared to accept significantly large fluctuations in value.

Investment in certain securities listed in China can involve significant regulatory constraints that may affect liquidity and/or investment performance.