Buying Asian technology shares instead of their U.S. peers has proven to be a winning trade this year. Valuations show they’re still a good bet, according to Kelvin Tay at UBS Wealth Management.
The CHART OF THE DAY shows the MSCI Emerging-Markets Information Technology Index is valued at 2.1 times assets, compared with 3.4 for its developed-nation equivalent, the biggest discount since 2008. The bottom panel shows the EM gauge rose 11 percent this year versus 1.7 percent for the MSCI World Index.
While hardware stocks led gains, Internet and software-services companies are poised to continue the rally, Tay, chief investment officer for Asia-Pacific, said in London on May 18. Indian outsourcing company Infosys Ltd. has a price-to-book ratio of 3.7 versus 11.3 for International Business Machines Corp. Shenzhen, China-based Tencent Holdings Ltd., Asia’s biggest Internet company, trades at 33 times 12-month projected earnings, while Facebook Inc. is 38 times and LinkedIn Corp. 78.
“EM IT stocks are cheap and undervalued,” Tay said. “The Asian IT space is broader and deeper at the moment compared to three years ago. The biggest company in China is now an Internet company.”
A transition from hardware manufacturing to the higher-margin business of consultancy and software services boosted the allure of developing-nation technology stocks, Tay said. Tencent posted a 60 percent increase in first-quarter profit as it raked in advertising revenue from its messaging services.
Emerging-market Internet stocks fell 8.5 percent in April as China cracked down on online pornography and U.S. technology shares sank. The rout drew Templeton Emerging Markets Group’s Mark Mobius, who said valuations of companies such as Tencent had dropped to “reasonable” levels.