Participating in Asia’s Innovations and Technology-Enabled Productivity Growth

In Asia, innovative leaders have been disrupting the productivity deadlock, powering sustainable growth through technology, and leveraging on the demographic tailwinds of the region—across 5G, cloud computing, biotech, enterprise digitalization, robotic automation, and more. However, the Asia ETF market is still constrained by mainstream market capitalization-based approaches with few efficient tools to position for secular growth trends contrary to the developed markets.

With Asia standing out as the front-runner amid the global low growth environment, having an efficient investment solution for Asia megatrends becomes more important than ever. With that in mind, we examined the major megatrends and actors that we believe are driving innovations and making material impacts on the social landscape, economic productivity, and regional growth in Asia. We then identified the three most prominent, technology-enabled investable overarching themes with extraordinary growth potential given the demographic and socio-economic trajectory in Asia.

With the capabilities from FactSet’s Revere Business and Industry Classification System (RBICS), we clustered the investable themes into three broad categories, which then expanded to over 130 granular levels of industry exposure that are deemed to be beneficiaries of technology innovations in Asia. The Premia FactSet Asia Innovative Technology Index thus re-thinks “innovative technology” in a more holistic approach. This strategy offers a diversified, multi-theme growth exposure to Asia’s innovative leaders and creates an agile building block for investors looking to fit such a strategy into their portfolio allocations.

Secular Growth Opportunities from Megatrends in Asia

Where to find growth has become ever more important in the current “slowbalisation” environment as The Economist aptly put it. While megatrends powered by innovations and technology-enabled transformations have been increasingly referenced as significant forces that one should not overlook, COVID and the unprecedented global events in the last year further strengthened these narratives. For investors, other than living through these megatrends every day, it is also a very attractive window in time to keep track of beneficiaries of these megatrends and position for investment opportunities early accordingly.

We would encourage a shift to frame the thinking about megatrends toward the trends that ultimately create lasting material impact on economic values:

1. Emerging Economies in the East

• • Share of global GDP is shifting from the West to the East
  • Asia transforming from cheap manufacturing bases to homes of innovation hubs
  • Asia accounting for nearly 80% of global economic growth and 85% of growth in global consumption

2. Social and Demographic Changes

• • An aging population with lowering birth rates has led to a reduction in active workforce
  • Improved standard of living and increase in healthcare spending
  • Changes in social behavior, accelerated by COVID

3. Environmental Challenges

• • Increasing awareness on climate changes due to both external scrutiny and growing consciousness
  • Government initiatives and policy supports to reduce carbon footprint and encourage the use of clean energy

4. Technological Breakthroughs

• • New innovations and developments in processing power (faster), precision (more accurate), and materials (better fit)
  • Hyper-connectivity of people (social media) and things (Internet of Things - IoT)

While technological advancement is arguably the backbone of all these transformational impacts, we increasingly find that technology has become an enabler, a language that drives the success of leaders across sectors. As investors, it is thus imperative that we do not limit ourselves to the technology sector alone as the change agent in the innovation space but look at technology as the key to unlock the enormous opportunities that drive Asia and global productivity growth in the coming decades. While some megatrends are global, we also need to look through a localized lens for investable themes that are particularly relevant in Asia and instrumental in value creation. This is an evolving journey and some of the trending themes include:

• Consumer preferences in online activities changing the supply chains
• Healthcare improvements, new drug discovery
• Internet of things driving connected living
• Smart cities and new infrastructure upgrade
• Automation and advanced manufacturing to replace repetitive labor work
• Improved standards of living with robotics and artificial intelligence
• Shift from oil and coal to clean energy
• Encouraged usage of electrical vehicles and solar panels

While we recognize that innovation is increasingly a key element for economic growth globally, it is game changing in Asia, especially China, that it is no longer about cheap manufacturing hubs. Inarguably, this part of the world benefited from globalization, copied best practices, and borrowed technologies from the western world to expedite growth in the last century. However, this is no longer the case—the new era is not about copying but innovating—as more and more Asia-born companies and unicorns are leading technology innovations across various sectors on the world stage.

The Genesis of the Asia Innovative Technology (AIT) Index

With the shift from copied-in-China to made-in-China and now innovate-from-China, the market saw strong inflows into China tech stocks and internet funds. We believe this emerging secular trend is not about China only, nor should it be limited to the traditional definition of the technology industry or merely internet companies like the BATs (Baidu, Alibaba, and Tencent). Unfortunately, there was no easy and efficient way to build an Asia innovation exposure. Does this mean that only a fundamental active approach would work? On the contrary, we believe given the availability of new information from public data sets, it would be a much more transparent and disciplined process using a rule-based systematic approach.

Thanks to the availability of data and the FactSet proprietary RBICS system, rather than having a fleet of research analysts conducting fundamental research, we can efficiently screen through tons of data and financial information across approximately 19,000 companies listed on 15 exchanges in Asia, and also in the U.S. with Asian ADR listings. Using FactSet’s genomic approach of industry classification based on companies’ revenue exposure to the innovative sectors, it is possible to identify the Asia-based technology-enabled innovative leaders and analyze their fundamentals in a rule-based systematic manner. We believe this approach would be more appropriate for growth opportunities compared to the broad Asia equity market over the long term.

Thematic investing itself is not completely novel in Asia as many active managers often have multiple themes at play in their portfolio; however, an efficient, rules-based index strategy designed specifically to capture beneficiaries of the megatrends is relatively new. In this collaborative effort, we aim to create an Asia complement to global growth portfolios, and an attractive alternative to investors who do not wish to rely solely on regional beta or China funds for their Asia allocations, and how such thematic strategy can fit into portfolio constructions.

Investing in technology-enabled innovators is a much more daunting task than a simplistic sector focus approach. This strategy is not only looking for companies that are relevant to the innovative exposures, but more importantly, companies that are meaningful drivers or beneficiaries of innovative technologies such that their relevance would be materialized and translated to sustainable earnings growth and outperformance compared to the broad region in the longer term.

Conclusion

For a more relevant and representative asset allocation that considers megatrends and technology-enabled transformations, it is important to identify the key drivers of future economic returns and sustainable productivity rather than looking to time the market or focusing on certain economies. The Asia Innovative Technology strategy not only offers an attractive alternative to investors who do not wish to be restricted to single region or sector funds, but also a valuable building block to global portfolios. Such thematic index investing focusing on the most relevant megatrends could therefore be one efficient solution that helps long-term investors to better capture quality growth opportunities in Asia.

To learn more about the Premia FactSet Asia Innovative Technology Index, visit the Premia Partners website.

The Premia Partners research team contributed this article.

This blog post has been written by a third-party contributor and does not necessarily reflect the opinion of FactSet. The information contained in this article is not investment advice. FactSet does not endorse or recommend any investments and assumes no liability for any consequence relating directly or indirectly to any action or inaction taken based on the information contained in this article.