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The future of the technology sector: The analyst view
Johnny Chan
Investment Analyst
KEY TAKEAWAYS
  • Supply and demand disruption from COVID-19 has impacted the technology sector, but the benefits from accelerated adoption are likely to offset weakness in consumer demand. 
  • Leading e-commerce, cloud, payment and SaaS companies could see greater take-up over the medium and long-term.
  • Strong balance sheets and asset-light business models have helped certain tech companies behave more defensively in recent market volatility.

 


How has COVID-19 impacted the technology sector?


COVID-19 has certainly made its impact felt across the tech sector. Looking first at physical technology, we’ve seen disruption in both supply and demand. When the outbreak first hit China and forced a lockdown in Wuhan province, the initial impact was seen in disruption to supply chains. As the pandemic spread across the globe, we began to see the impact on the demand side, particularly in consumer goods.


The drop in demand has played out differently between companies, depending on production lead times. For example, the long lead time in semiconductor manufacturing meant that that Taiwan-based TSMC actually saw relatively strong orders in first months of 2020 as customers secured supply. However, as the demand shock feeds through the system, it’s likely that it will see greater impact on revenues in the second half of the year. By contrast, Apple saw a more immediate hit to its sales revenue, firstly in China, followed by the rest of the world, as consumption patterns altered in reaction to the coronavirus outbreak.


Internet and software companies experienced a surge in demand as digitalisation trends seen over the last five to 10 years accelerated. Activity in e-commerce, on-demand video streaming and cloud-based services, including online conferencing/education, has increased as people adapted to life in lockdown. These companies have acquired a range of new users, many from previously underpenetrated demographic segments, such as the older generation who haven’t historically been big users of online food and grocery platforms.


 


China’s mobile internet usage


Data as at 31 March 2020. Source: QuestMobile, TRUTH China Mobile Internet Database


 


But there have also been headwinds for these companies. Advertising revenues have been adversely affected as companies tighten budgets, particularly small and medium-sized businesses which tend to be an important market in online advertising. New product launches are also likely to be delayed.


Despite the setbacks, the increased take-up of internet-based services and the corresponding demand for data centres and semiconductors are likely to offset weakness from the fall in consumer-related demand.


 


China was particularly effective in containing the virus, can you explain the role of technology in its efforts?


The entrenched position Alibaba and Tencent have in Chinese life really has no equivalent elsewhere in the world, and these companies reacted quickly to the coronavirus outbreak. Wuhan province was locked down on 23 January and by mid-February both WeChat and Alipay had established ‘health QR code’ apps. These apps required users to input their health information and travel history. Using this information, coupled with additional personal data held on these platforms, the apps created user profiles and designated a health code of green, amber or red. Anyone with a ‘red’ code had to quarantine. Those with a green code could begin to return to work, scanning a QR code to keep a record of their travel history for contact tracing. Tencent recruited 900 million users adopting the health QR code, which is a staggering number in such a short time and could present interesting monetisation opportunities in the future.


Setting aside the privacy issues around data collection, this exercise has illustrated the powerful tool that technology can be in combating health emergencies like this one.


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Risk factors you should consider before investing:

  • This material is not intended to provide investment advice or be considered a personal recommendation.
  • The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment.
  • Past results are not a guide to future results.
  • If the currency in which you invest strengthens against the currency in which the underlying investments of the fund are made, the value of your investment will decrease.
  • Depending on the strategy, risks may be associated with investing in fixed income, emerging markets and/or high-yield securities; emerging markets are volatile and may suffer from liquidity problems.


Johnny Chan is an equity investment analyst at Capital Group with research responsibility for Asian internet and real estate in Hong Kong. He has 21 years of investment experience and has been with Capital Group for 13 years. Earlier in his career at Capital, he also covered Indian IT services, European payment technology, and Japanese technology hardware companies. Prior to joining Capital, Johnny was an analyst with J.P. Morgan. Johnny is a graduate of Harvard Business School's Advanced Management Program, holds a postgraduate diploma in accounting and finance from the London School of Economics and a bachelor’s degree in electronic engineering from Hong Kong University of Science and Technology. He also holds the Chartered Financial Analyst® designation. Johnny is based in Hong Kong.


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Past results are not a guarantee of future results. The value of investments and income from them can go down as well as up and you may lose some or all of your initial investment. This information is not intended to provide investment, tax or other advice, or to be a solicitation to buy or sell any securities.

Statements attributed to an individual represent the opinions of that individual as of the date published and do not necessarily reflect the opinions of Capital Group or its affiliates. All information is as at the date indicated unless otherwise stated. Some information may have been obtained from third parties, and as such the reliability of that information is not guaranteed.