Tencent’s 2,636 per cent rally in a decade explains why Asia’s stock boom is different this time around
As Asia’s benchmark stock index climbs to within a few points of its November 2007 peak, tech companies are jumping squarely onto centre-stage.
For most of the past two decades, technology companies have been supporting players in Asian equity markets -- rarely taking leadership roles during rallies and almost always ceding the spotlight to the region’s giant financial firms.
Not any more. As Asia’s benchmark stock index climbs to within a few points of its November 2007 peak, tech companies are jumping squarely onto centre stage.
Led by Tencent Holdings’ 2,636 per cent surge over the past 10 years, tech has surpassed finance as the largest component of the MSCI Asia Pacific Index for the first time since the internet bubble burst in 2000. The industry is climbing twice as fast as its closest rival in Asia this year and has trounced gains among tech shares in the U.S. and Europe.
The good news for investors: In aggregate, Asian tech companies are still cheaper than their global counterparts and trade at valuations below levels that foreshadowed previous bull market peaks. Buoyed by the success of Tencent’s WeChat messaging service, Alibaba Group Holding’s e-commerce business and Samsung Electronics’ gadgets, the industry’s profits are projected to jump 30 per cent to all-time highs in the next 12 months.
“Prices are high, but earnings are strong,” said Guillermo Felices, who helps oversee about US$93 billion as a London-based senior portfolio manager at BNP Paribas Asset Management. “I see it as a structural, secular story rather than a cyclical one. That’s very different from the situation in the late 1990s when we saw the dot-com bubble.”
Like their global peers, tech shares in Asia have surged on optimism that the sector will grab a bigger slice of traditional businesses from finance to retailing and health care. But Asia’s tech companies have also benefited from home grown trends, most notably China’s efforts to increase the role of tech and service industries in its US$11 trillion economy.
Tencent, which added more than US$400 billion of market value over the past decade, has been one of the largest beneficiaries of China’s shift. While the Shenzhen-based firm still earns a big chunk of its profits from online games, much of the stock’s rally in recent years has been fuelled by expectations that a favourable policy environment in Beijing will help boost its still-nascent advertising and finance businesses -- both of which target WeChat’s nearly one billion users.
Tencent is now the biggest stock by weighting in the MSCI Asia Pacific index, followed by Samsung, Alibaba and Taiwan Semiconductor Manufacturing. In 2007, none of the gauge’s top five companies were in the tech industry. Tencent ranked a lowly 221.
Tech’s stand-out performance during the MSCI index’s current bull market, which started in February 2016, has also been a break from the past. The industry has tended to be a middling performer during rallies, ranking fourth or below during five of the past six Asia bull markets. This time it’s up 99 per cent, outpacing the broader measure by about 50 percentage points.
Some worry that the outsize gains may not last. Any signs of disappointment from tech companies during the third-quarter earnings season could spur a short-term sell-off, according to James Thom, a Singapore-based money manager at Aberdeen Standard Investments.
Still, Thom says the gains so far have been supported by strong profit growth and “reasonably constructive” valuations. The MSCI Asia Pacific tech index is priced at 16 times estimated earnings for the next 12 months, versus an average of 17 at peaks in the gauge over the past decade, data compiled by Bloomberg show. Benchmark tech indexes in the U.S. and Europe have multiples of 19 and 21, respectively.
“We’re still comfortable with valuations despite the rally,” said Andrew Gillan, the Singapore-based head of equities for Asia excluding Japan at Janus Henderson, which oversees about US$345 billion. “Investors outside the region underestimate the amount of innovation in Asia.”
While tech’s rise has been the most notable shift in Asia’s equity market over the past decade, it’s not the only one. The following charts highlight other trends since 2007.
Despite the rally in tech shares, MSCI’s Asia Pacific index has lagged behind the S&P 500 over the past decade. The U.S. equity gauge is now more than 60 per cent higher than its pre-Financial Crisis peak.
A big reason for Asia’s underperformance is the slump in “old economy” industries like energy and raw materials. Authorities in China, the region’s biggest economy, have been trying to shift away from those businesses as they seek a more sustainable growth model.
In Asia, it has paid to be small over the past decade. Benchmark equity indexes in Pakistan, Sri Lanka and the Philippines have led regional gains, while China has been the biggest laggard as the nation’s Old Economy shares slumped.