Roundtable panellists:

• Yash Patodia, partner and portfolio manager, Wellington Management;

• Fan Cheuk Wan, chief investment officer, Asia Private Banking and Wealth Management, HSBC;

• Julie Koo, managing director head of Citi Investment Management Sales, APAC Citi Private Bank

Moderator: Genevieve Cua, wealth editor, The Business Times

ASIA is widely expected to pick up speed as a global economic powerhouse, post-pandemic. We ask the experts for their views on the likely impact Asia tech would make on digital transformation, and their strongest investible ideas.

Question: What potential does Asia hold as a global centre for technology innovation, serving both the region and the world?

Yash Patodia: Asia is becoming the world's hub of innovation and consumption. The region is the largest population centre and thereby provides a natural hub of consumption, access to deep labour markets, and eventually innovation. Asia has the highest number of tech companies, especially among lesser-known small- to medium-sized firms.

Already, it is home to the world's technology supply chain and tech manufacturing, and by extension, the future innovation hub of much of the world's GDP.

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In fact, Asia tech has significantly more small companies than the rest of the world combined. There is a common misconception that global tech offers sufficient exposure to Asia, but with over 1,400 companies in Asia-Pacific that are below US$5 billion in size, it is conceivable that many of them are not found in globally-diversified technology funds.

Developments within Asia tech will offer practical remedies to many of the world's challenges over the coming decades. As data generation expands rapidly, Asia tech will provide the building blocks for faster networks, more data centres and new neural networks that will replace older central processing units. Further, the lack of legacy systems in emerging Asia has opened the opportunity for countries to leapfrog and become innovation leaders.

Moreover, with smartphones, many consumers in Asia now have access to a computing device for the first time. This has increased their reliance on the products and services offered online and allowed many new Internet companies to emerge and scale rapidly.

Fan Cheuk Wan: Asia is already a global centre of technological innovation: China, Japan, Korea, Taiwan and Singapore are recognised as world leaders in the development of artificial intelligence, Big Data, semiconductor, fintech, automation, health sciences and 5G technology.

Asia's technology supply chain is pivotal to the world given that over 80 per cent of global installed semiconductor manufacturing capacity is in the region. Currently US fabless semiconductor companies almost exclusively rely on Asian producers for leading-edge, 7-nm-and-below chip production. Asia's dominant position in the global technology supply chain is partly attributable to the enormous size of its domestic market.

Asia accounts for 60 per cent of global semiconductor sales with China alone contributing over 30 per cent of global semiconductor revenues. Since 2016, China has become the world's biggest buyer of semiconductors. Most of the 15 largest global semiconductor companies generate more sales from China than the US. The huge markets in China and Asia provide a distinctive scale advantage for technology investment and innovation.

There are multiple secular drivers supporting technological innovation in Asia, from the decisive government policy support and accelerating digital transformation, to the sustained re-investment of corporate cashflows into capital expenditure and R&D spending.

Asia's high quality human capital offers another favourable driver for tech. China is expected to see another record-breaking year in terms of number of fresh university graduates at over 9 million in 2021. Around 40 per cent of them are concentrated in the science and engineering fields. The increasingly highly-skilled and specialised labour force renders a strong competitive edge for Asia to strengthen its dominance as the global centre of technological innovation.

Julie Koo: US-China (G2) tensions caused a lot of chaos in markets as they heightened in 2018. However, companies and investors have had time to adjust to the new normal of strategic competition between these two global power houses.

Ultimately, US-China competition may require two technology standards to be set up, which will mean that the rest of the world will need to adapt to both standards. This will, without doubt, favour businesses that offer the building blocks of software and hardware and are in a position to supply both G2 powers.

Despite US efforts to cut China off from US technology, we believe that over time, China will find alternative sources. The US's current chokehold is in semiconductor chip design and fabrication equipment. This will remain a huge advantage in the age of 5G, and create significant issues for China's advances in areas from high-end smartphones to its space exploration programme.

However, in the coming decade, the US advantage may fade as advances in modern computing continue to evolve. For example, China and the US have already made early progress in quantum computing technology, which has become a priority in China's 2025 technology investment plan.

These technologies are still in their infancy, and may level the playing field between the G2 powers in the future.

Q: Covid-19 has spawned winners and losers in the Asian tech space. What do you see as the major investible themes?

Yash: There are three major investible themes in the Asian tech space:

• Pervasive tech: In the next five years, Asia tech will continue to broaden far beyond the industries traditionally thought of as 'high-tech'. Once-sector-specific component producers have erupted out of the tech industry to add technology to nearly every segment of the economy.

• Local solutions for local markets: Work-from-home capabilities, streaming entertainment and online food delivery are among the many tactical changes that could fuel long-term structural opportunities. Local companies that best understand customer preferences and cultural nuances will be able to adapt and benefit.

• New business models: Beyond helping to weather the pandemic, Asia tech enables solutions like autonomous cars, predictive train-track maintenance, and improved medical imaging, among others.

From leading-edge computer chips and image sensors to simple components like capacitors, Asia tech is supplying the building blocks of innovation that enable everyday objects to be upgraded to 'smart' tech.

Cheuk Wan: The Covid-19 pandemic has accelerated digitalisation, automation and healthcare innovation across Asia. Asian technology companies stand out as geared beneficiaries of digital transformation propelled by Covid-19 while the rapid development of the Internet of Things, artificial intelligence and 5G technologies are helping to facilitate further digitalisation and automation in the manufacturing sector.

The global competition in vaccine development and medical treatment for Covid-19 has promoted the development of biotechnology and healthcare innovation in Asia. Public fears of face-to-face meetings and personal contact open up exciting opportunities for medical innovation including telemedicine, remote diagnosis, e-prescriptions, online booking services and digital dispensary services in Asia.

In the industrial sector, the pandemic has raised widespread awareness among manufacturers about supply chain security. Covid-19 has reshaped business strategies of Asian manufacturers to step up automation to achieve smarter production through robotic deployment.

Under the megatrend of digital transformation, we focus on high conviction themes exposed to Asia's digital consumption, automation, healthcare innovation and 5G rollout over the long term.

The key criteria that we consider in picking the long-term winning themes include government policy support, consumer demand outlook, profitability and competitive landscape.

Julie: Covid may be with us for many years to come, but the disruptions to life caused by the pandemic will continue to subside. This means that people will be able to travel and mingle again.

The firms which have profited hugely from the depth of the pandemic like online media, gaming and e-commerce are likely to see slower growth this year and next. Meanwhile, those which have lagged during the pandemic will have the opportunity to catch up.

Over the long term, we believe much of the digital transformation towards the "contact-free" economy is irreversible. We expect existing megatrends of automation, e-commerce, digital banking, telehealth, remote learning, mobile device interaction, digital leisure, and remote working to be reinforced in a post-pandemic future.

Structural changes will be driven by a small group of innovative market participants, and could further magnify the strength of some of the mega-cap companies. The winners of digital transformation are highly likely to enjoy economies of scale, which would be a huge invisible barrier to new market entrants.

The pandemic has also accelerated the focus on sectors like fintech, particularly online payments.

E-commerce will continue to grow exponentially and we will continue to see more technology developments and innovation in order to support that growth.

We expect global mobile payments to experience one of the strongest growth rates over the next five years and influence other potential mega trends like digital currencies and banking.

Q: How important is it for a technology investment to be sustainable?

Yash: As part of the bottom-up stock research process, we incorporate environmental, social and governance (ESG) criteria into our analysis of individual companies.

ESG considerations are helpful in determining the quality of management and product. In a hyper-competitive market, the focus of management in delivering quality products to their customers has as much impact to near-term earnings as it does to longer-term brand value and customer retention.

Human capital is another focus for us. The equitable treatment of all shareholders and stakeholders is a distinction of good corporate governance - and responsible behaviour is important to garner trust in new, disruptive solutions. We also engage with companies to educate them about the benefits of tracking ESG metrics and adopting best practices.

Tech companies are providing solutions to many of the world's challenges from healthcare needs to climate change. ESG considerations should play a part in investor decisions to invest in companies that can execute these solutions both globally and at a local level; and they also play a crucial role in identifying risks and opportunities. This philosophy is the basis for our quality bias and long-term horizon.

Cheuk Wan: We believe ESG factors are relevant to all sectors and a sustainable investment approach provides effective investment tools to protect the technology portfolios from environmental, social and governance risks.

For the capital intensive and upstream chipmakers, we focus on environmental issues including energy consumption, water shortages, carbon emissions, and raw material shortages.

For renewable energy companies, we focus on their climate impact as key solutions to achieve decarbonisation. For printed-circuit board manufacturing, we evaluate water usage and pollution caused by the companies in reviewing their climate impact.

In the labour-intensive downstream assembly businesses, workplace health issues and safety protection play a major role in our ESG analysis.

In the digital economy sectors, environmental issues such as emissions from the use of data centres along with waste from the packaging materials needed for e-commerce and food delivery are key factors that we assess.

Our key focus is to evaluate how the companies employ advanced technology to reduce pollution and become more environmentally friendly.

Furthermore, governance factors are prevalent across the entire technology supply chain due to direct financial impact of government subsidies, regulations, collusion and antitrust behaviour.

Julie: Technology investors are increasingly looking to ascertain not only what the drivers of growth are for these companies, but also how that growth is being delivered. There are a number of sustainability topics that are relevant to technology companies.

We see business ethics and governance structures as the most material sustainability topics facing most tech firms worldwide today.

Other sustainable factors like data privacy & protection may be the leading focus for software/Internet firms whereas data encryption, customer consent management, and data-sharing may be the larger focus for online payments firms.

Diversity, focusing on a more inclusive workforce and ensuring equal opportunities for all employees regardless of their gender, ethnicity and nationality, is a key topic and the tech sector is no exception. For example, we see a particular emphasis on gender equality, and increasing female representation in US tech firms.

Intellectual property rights (IPR) & protection is a topic that we expect will become more material and prevalent for tech firms over time, if not already. We also believe that waste management (both during production and after consumption) will become an important topic for tech firms over time.

Clean energy, not only from the perspective of own usage, but also as enablers of renewable/reusable energy, is rising in focus among tech companies.

Highlights

Asia, hub of digital transformation

• Has lion’s share of global semiconductor sales

• A large number of tech SMEs

Investible ideas:

• Digital consumption, automation, e-commerce, digital banking, telehealth, digital payments

Sustainability

• ESG helps ascertain quality of management and products

• Focus on human capital: Equitable treatment of shareholders & stakeholders