How real are the investment opportunities in the region? Investors must temper excitement with prudence to avoid wipeout.
Asia is no longer a place where everything is produced but nothing is invented. The region is riding a wave of home-grown innovation with long-term investment implications.
Innovation promises both great change and great profit opportunities, yet it often comes with increased risk and uncertainty. Sometimes it requires a leap of faith.
Understanding innovation, however, gives committed active investors a potential advantage over passive, or systematic, investors. Many of the issues that innovation brings to the fore are inherently unquantifiable. We have to use our best judgement, our knowledge of history and, perhaps, good old common sense to navigate both the opportunities and the risks.
Asia used to be seen, with some justification, as a region that did not innovate. Imitation was rife. Some companies would watch, learn and then imitate the best.
Copying the best ways of doing things has helped to propel productivity and wage rises throughout the region over the past few decades. But, as Asian populations have grown and become richer and the continent’s citizens have seen what wealth creation can do for living standards, scientists, business leaders and politicians alike can see the value of true innovation, which has given rise to the region’s own brands, intellectual property and market structures.
Now, we are starting to see advances in different areas, particularly in technology and healthcare, but also in the way that developing countries initiate reform programmes. For example, banks in India, looking to serve millions in rural areas, are skipping bricks-and-mortar branches in favour of smartphones, while South Korea is doubling down on research and development spending to boost its battery cell and semiconductor businesses.
Meanwhile, Japan, with its ageing population, has long been at the forefront of mechanisation and the automation of manufacturing, and researchers in China are mapping genomes to expedite cancer research and drug development.
Novel business models are arising based on the different ways in which Asians live their lives compared with Americans and Europeans. Access to financial markets and the desire of governments to democratise credit have led to new solutions.
A halo is not enough
The increased spending power of Asian workers has led to a rise in domestic brand names. Multinationals can no longer rely on a halo of quality or exclusivity around their technology or brands when domestic businesses are emerging as true competitors, better attuned to the preferences of the consumer, and sometimes with better technology.
Rapid innovation can bring challenges, of course. Regulation often lags behind technology. We have seen the issues around data privacy with some of the online giants in the US. How will Asia deal with such issues? As innovation evolves, just how real are the opportunities? Exciting as they may seem, huge amounts of money may be invested on the basis of little more than speculation. This excitement may be good for the overall speed and direction of R&D, but as investors, are we going to benefit? The population of Asia as a whole may benefit, but will we profit?
Although innovation may hurt many traditional companies, other firms may be able to adapt. There may still be much value in traditional sectors in tandem with the advances. Win or lose, it is a complex environment of new and old industries interacting, often in stark ways, but also sometimes in more subtle ways that can be win-win.
We try to sort through the landscape of innovation and reform in Asia. How do we think about some of the new opportunities at Matthews Asia? Which are the more established businesses? Which are more speculative?
As active investors focused on Asia, we have always believed that the benchmarks are too backward-looking. And many of the exciting trends that we see today will be reflected in the major regional benchmarks only in the years or decades to come.
In the meantime, we must temper any excitement with a level-headed investigation of the various types of innovation in Asia and try to find the best investment opportunities.
Robert Horrocks is chief investment officer and portfolio manager at Matthews Asia.