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Asian Tech Stocks Experience Major Selloff Amid Concerns Over AI Boom Sustainability
Asian technology stocks faced their steepest decline since the early pandemic days following Morgan Stanley strategists' recommendation for investors to secure profits from the artificial intelligence boom. Concerns over the durability of the fervent AI market and potential tightening of US tech export restrictions to China exacerbated the downturn.
Market Impact
The Bloomberg Asia Pacific Semiconductors Index plunged by up to 3% on Monday, marking its worst four-day drop since March 2020. Morgan Stanley suggested a strategic shift towards consumer staples ahead of the anticipated first Federal Reserve interest rate cut in September. The firm downgraded its stance on Asian and emerging-market tech stocks to an equal-weight position, removing key AI chip-sector stocks, such as Taiwan Semiconductor Manufacturing Co. (TSMC), from its priority lists.
Strategists, led by Jonathan Garner, stated, "It is now time to move to the sidelines," highlighting the overbought and pricey nature of tech shares. They pointed out that shifts in Asian market leadership historically precede the first Fed cut. This represents the brokerage's first downgrade in the sector since elevating it to overweight in October 2022.
Shifting Focus
On the contrary, Morgan Stanley elevated their view on consumer staples to overweight for the first time in at least five years, citing their “less demanding” expectations through 2026 and “classic defensive characteristics in a global growth slowdown.”
Global AI Stock Boom Wobbles
The global AI stock surge, spearheaded by Nvidia Corp., stumbled last week as investors reconsidered the prospects for continued gains amid prospective central bank policy changes and the upcoming US presidential election. This re-evaluation has provoked a shift towards undervalued market segments, including consumer stocks and smaller caps.
In addition to TSMC, other companies removed from Morgan Stanley’s top picks included South Korean memory maker SK Hynix Inc. and chip-equipment maker Tokyo Electron Ltd., each experiencing more than a 2% drop on Monday.
Not Completely Writing Off Tech
Despite the downgrades, Morgan Stanley isn't entirely dismissing the tech sector. The strategists emphasized the upcoming "AI smartphone cycle" as a critical area to monitor, maintaining Samsung Electronics Co. and iPhone assembler Hon Hai Precision Industry Co. on their focus lists.
Analysts, including Shawn Kim and Charlie Chan, noted in another report, "We are not calling for the ‘end of the cycle’ – but with all the focus on shortages and talk of a new AI paradigm, it is important not to lose sight of the normal, cyclical nature of the semiconductor market."
