Looking back, we now appreciate hacking away at rockfaces and digging ever deeper into unyielding terrain, which were not the most reliable means of getting rich quickly. It was usually far more profitable to sell the equipment needed to hack and dig in the first place.
Even though the events that unfolded in Coolgardie, Cariboo, and Klondike are in many ways unrecognizable today, the notion still holds true.
The term pick-and-shovel investing is derived from this harsh lesson. Even though the events that unfolded in Coolgardie, Cariboo, and Klondike are in many ways unrecognizable today, the notion still holds true. Take the technology sector and dramatic advances in artificial intelligence (AI) fields. Which businesses in this space will most likely 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 pick-and-shovel school of thought suggests otherwise. It tells us the most promising opportunities could instead lie in less celebrated businesses but right at the heart of the revolution that is now well underway.
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 significantly benefited from the diversification of global supply chains, which is set to continue.
Adopting 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. Yet many promising tech enablers can also be found at the other end of the market-capitalization spectrum. The problem for investors is that these businesses are far less likely to appear on their collective radar.
This is because smaller Asian companies are frequently under-researched. Despite their appeal, many are covered by only a few investment analysts or none.
The fundamental goal is to identify quality businesses whose promise has yet to earn wider recognition and may be attractively valued.
Investment teams conducting in-depth, on-the-ground assessments and face-to-face engagement are 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 may be attractively valued.
Long-term growth potential
A leading Taiwan-based company that produces and sells precision motors, AC/DC brushless fans, electric fans, and micro cooling fans is a classic example of a picks-and-shovels company in the tech sphere. Heat-dissipation technology has become increasingly important amid the ever-rising demand for computing power.
Another Taiwan-based company mainly engaged in producing and distributing copper-clad laminates is another enabler that consistently escapes many investors’ attention. Copper-clad laminate is a base material for printed circuit boards (PCBs) used in every major electronic device and supply-related service for a growing global client base.
Similarly, the work of a semiconductor material manufacturer based in Korea is vital to the tech-fueled hyperconnectivity that has come to define life in the 21st century. The business manufactures testing gear for PCBs and semiconductors.
An essential point for investors is that smaller companies like these have more scope to grow over time.
An essential point for investors 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.
Final thoughts
It’s important to remember that Asia is a region broadly characterized 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 challenging. But today, as then, the people most likely to succeed are those possessing the right tools for the job.
Important information
Projections are offered as opinion and are not reflective of potential performance. Projections are not guaranteed and actual events or results may differ materially.
Foreign securities are more volatile, harder to price and less liquid than U.S. securities. They are subject to different accounting and regulatory standards, and political and economic risks. These risks are enhanced in emerging markets countries.
AA-041024-184008-1