We take a “quality income” approach to investing in Asia Pacific (ex Japan), focusing on liquid companies with strong balance sheets, good governance, solid barriers to entry, and an ability to pay – and grow – dividends. As part of our investment process, we also take into account top-down factors like a country’s political and macroeconomic backdrop, as well as demographics, trade relationships and sector trends.

We avoid chasing short-term “wins”, instead looking for businesses that we believe have the strongest prospects over the longer term. We only invest where we have the highest conviction, though an active, unconstrained approach gives us the freedom to divest if our views change due to new information.

A huge technological transformation

We believe that the Asia Pacific (ex Japan) region is home to several world-leading businesses in the technology sector, and as such, we have always held tech exposure in our Asian Equity Income strategy. However, in light of recent technological advancements – namely those related to artificial intelligence (AI) – our conviction in these positions has only grown stronger. We believe that these trends are likely to play out over the longer term, with several companies set to benefit over the coming years.

We last saw a peak in the tech replacement cycle in 2020, when lockdowns were enforced globally following the outbreak of the Covid-19 pandemic, resulting in a huge ramp-up in technology spending. These new purchases were being made because of the situation forced upon consumers, rather than because of significant advancements that had been made in the sophistication of the technology itself.

Now, four years on from the start of Covid-19 global lockdowns, we’re approaching the point in time when we would usually expect to see another round of tech replacement, regardless of technological developments. However, given huge advancements in AI, we believe this replacement cycle will be the biggest ever and will last longer than normal. We expect new tech investments to be rolled out at an accelerated pace; over the next several years, we predict that many people globally will realise that their current tech assets have become pretty much obsolete.

Asia is leading the way

We believe that several tech hardware companies in the Asia Pacific (ex Japan) region are primed to benefit strongly from the global rollout of AI. In our view, Taiwan and South Korea, in particular, are home to some of the best-in-class tech companies in the world. We believe it is possible to identify several tech companies based in the region that are trading on attractive valuations, not only on an absolute basis, but also on a relative basis when compared to many US large-cap tech stocks.

In total, we have exposure to five tech companies, four hardware companies and one services company, all of which we view as enablers of AI. Given our strengthening conviction, since the start of January, we have decided to increase the Asian Equity Income strategy’s weighting in the tech sector, so it is now our strategy’s largest sector allocation.

We believe that each of the tech companies we hold are either the best, or among the best, at what they do; as such, each is a top 10 position in the strategy. We think that these businesses complement each other well, rather than fighting over market share, so that each deserves its place in our portfolio. All of these companies have a net cash balance sheet and they offer attractive dividend yields.

Taiwan Semiconductor Manufacturing Company (TSMC): TSMC is the world’s largest semiconductor manufacturer, with a near monopoly in leading-edge semiconductors. It manufactures 100% of Nvidia’s high-end GPUs. TSMC expects its revenue to grow 20% to 25% year-on-year in 2024.

MediaTek: MediaTek is a fabless semiconductor company which designs chips that power more than 2 billion devices a year, including smartphones, making the company the number one provider of smartphone chips globally. MediaTek recently posted better-than-expected Q4 2023 results.

Samsung Electronics: Samsung is the world’s largest memory manufacturer and is also a leading producer of smartphones, TVs and PCs. Samsung has already launched an AI feature phone, the Galaxy S24, ahead of its peers.

Hon Hai Precision: Hon Hai (Foxconn) is the world’s largest electronics manufacturer, producing everything from smartphones (it assembles roughly two thirds of all iPhones) to AI data centres.

HCL Technologies: IT services is arguably India’s most successful export sector. HCL Tech is the third largest Indian IT services company, and it has recently been outperforming its larger peers. HCL Tech is already helping its clients across the globe to utilise AI in their businesses.

These holding examples are for illustrative purposes only and are not a recommendation to buy or sell.

Winners and losers

We believe that Asia is home to several best-in-class tech hardware companies, which should be set to benefit from the forthcoming tech replacement cycle. While some of these companies suffered earnings declines last year, we expect to see a rebound in earnings this year; meanwhile, we think those companies that already delivered strong earnings last year are likely to see continued growth momentum as the need to embrace AI is recognised.

While we are confident about the longer-term outlook for the positions we hold in the strategy, at the same time, we are cognisant of the risks that many companies and sectors could face over the coming years as their current tech becomes obsolete. Our active approach will allow us to adjust our allocations if we believe any of our investee companies are struggling to adapt effectively.

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A key feature of Jupiter’s investment approach is that we eschew the adoption of a house view, instead preferring to allow our specialist fund managers to formulate their own opinions on their asset class. As a result, it should be noted that any views expressed – including on matters relating to environmental, social and governance considerations – are those of the author(s), and may differ from views held by other Jupiter investment professionals.

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