The gold rushes of the 19th century saw thousands of prospectors descend on mines around the world in the hope of unearthing a fortune. The vast majority left empty-handed and poorer than when they arrived.
Looking back, we now appreciate hacking away at rockfaces and digging ever deeper into unyielding terrain were not the most reliable means of getting rich quick. It was usually far more profitable to sell the equipment needed to hack and dig in the first place.
The term “picks-and-shovels investing” is derived from this harsh lesson. Even though the events that unfolded in the likes of Coolgardie, Cariboo and Klondike are in many ways unrecognisable to us today, it is a notion that still holds true.
Take the technology sector and dramatic advances in fields such as artificial intelligence (AI). Which businesses in this space are most likely to reward investors with solid performance over the long term?
It may be tempting to infer the established tech titans are the obvious answer. After all, a handful of these companies were responsible for a substantial chunk of global returns in 2023 and during the first half of 2024.
Yet the picks-and-shovels school of thought suggests otherwise. It tells us the most promising opportunities could instead lie in businesses that are less celebrated but nonetheless right at the heart of the revolution that is now well under way.
We might usefully think of these companies as “tech enablers”. Together, they represent one of the most significant structural trends shaping informed investment decisions – particularly in Asia.
Beyond the big players
Asia already accounts for more than half of the world’s GDP growth. Its economies have benefited greatly from the diversification of global supply chains, and this is set to continue.
The adoption of “China plus one” and “China plus two” outsourcing strategies in light of the evolving geopolitical landscape is a key element of this trend. Crucially, so is the region’s expanding range of tech capabilities.
For instance, Taiwan and South Korea are hotbeds of semiconductor production. Vietnam is a notable player in the electronics arena. Thailand is carving a niche in the sphere of printed circuit boards. Malaysia is home to engineering talent and software design companies.
Several sizeable and well-known businesses have long since garnered investors’ attention – often deservedly so. Arguably foremost among them is Taiwan Semiconductor Manufacturing Company (TSMC), whose market valuation of more than $750 billion places it comfortably in the pantheon of mega-cap behemoths.
Yet many promising tech enablers can also be found at the other end of the market-capitalisation spectrum. The problem for investors is that these businesses are far less likely to appear on their collective radar.
This is because Asian smaller companies are frequently under-researched. Despite their appeal, many are covered by only a tiny number of investment analysts – or even by none at all.
Investment teams that conduct their own in-depth, on-the-ground assessments and face-to-face engagement are therefore likely to have an edge in unearthing these hidden treasures. The fundamental goal is to identify quality businesses whose promise has yet to earn wider recognition and which, as a result, may be attractively valued.
Long-term growth potential
Taiwan’s Sunonwealth Electric Machine Industry is a classic example of a picks-and-shovels company in the tech sphere. Amid ever-rising demand for computing power, heat-dissipation technology has become increasingly important. Sunonwealth makes specialised cooling fans, including for laptops, servers, communication networks and in-car electronics.
Taiwan Union Technology is another enabler that consistently escapes many investors’ attention. It produces copper-clad laminate, a base material for the printed circuit boards (PCBs) that go into every major electronic device and supplies related services to a growing global client base.
Similarly, Leeno Industrial’s work is vital to the tech-fuelled hyperconnectivity that has come to define life in the 21st century. Based in South Korea, the business manufactures testing gear for PCBs and semiconductors.
An essential point for investors, of course, is that smaller companies like these have more scope to grow over time. The best may become the large-caps or even the mega-caps of the future.
By way of illustration, look no further than TSMC. Now routinely ranked among the world’s 10 biggest businesses by market capitalisation, it was worth around $10 billion – still in mid-cap territory – in the late 1990s. Sure, its addressable market today is larger than those of the companies mentioned above, but this does not necessarily mean its share price will do better – nor that these small-caps cannot evolve to capture emerging growth opportunities.
Remember, too, that Asia is a region broadly characterised by supportive policies, cost-competitiveness and a commitment to industrial development. This reinforces our belief that the structural trend of Asian tech enablers is set to endure.
As with the gold rushes of old, the landscape can be a challenging one. But today, as then, the people most likely to succeed are those in possession of the right tools for the job.
Important information:
- The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
- Emerging markets tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
Other important information:
Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.
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