AI Stock Rout has investors in Asia mapping the next catalyst

(Bloomberg) — There’s intense debate over whether the AI ​​rally is over, but for some investors, another drawdown could be a buying chance.

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Money managers in Asia are looking for their next buy, even after the region’s technology stocks posted their biggest two-day drop ever this week, reflecting unshakable confidence in a trade that has underpinned the rally in global stocks. They are still attractive bets given that the long-term prospects for AI remain unchanged, they say.

“Some of them definitely look a little more attractive to us than, say, two weeks ago, given how much they’ve fallen,” said William Yuen, chief investment officer at Invesco Hong Kong Ltd. due to more sales, so we will be adding.”

The debate gets to the heart of a question that has dogged stock investors for months: Has the hot trade in AI finally reached an inflection point? Cracks are appearing as analysts question whether the industry will be able to live up to the hype and whether the returns will justify the heavy investments that have been invested.

Here are six charts to show the situation and why some investors are keeping faith in the trade:

Asia’s tech names are still a force to be reckoned with, even as one stock gauge heads for its longest streak of weekly losses since late 2022. The combined market cap of TSMC, Samsung and SK Hynix is $1.2 trillion, compared to $312 billion a decade ago. Its weight in the MSCI Emerging Markets Index has increased to almost 15%, from less than 4% at the end of 2007, according to Bloomberg calculations.

Analysts raised their earnings estimates on top Asian chip stocks despite the recent rout, unlike in the US where consensus has been lowered since late July. Morgan Stanley reinstated TSMC as its top pick following the latest sell-off, citing the company’s “quality and defensive nature during a prolonged bearish semi-cycle.”

“Confirmation of rising prices and continued strength in AI investments should be key catalysts,” Morgan Stanley analysts including Charlie Chan wrote in a note on Tuesday.

Both TSMC and Samsung reported a solid drop in second-quarter results, while analysts said TSMC’s margin guidance indicated a potential price increase for its high-end chips. The two companies and SK Hynix are expected to report earnings growth of 26% to 55% next year, compared with an average of just 12% for members of the MSCI Asia Pacific index, according to data compiled by Bloomberg.

The story continues

“TSMC is the dominant foundry, so we think they are in a pretty solid position,” said Ganesh Ramachandran of Lazard Asset Management, whose $1 billion Lazard Emerging Markets Fund has the stock as one of its biggest. participations. As for SK Hynix, the company’s memory business is a cyclical industry that has just “started to come back,” he said.

The Bloomberg Asia Pacific Semiconductors Index is down nearly 20% from its peak in July, but the decline is relatively small compared to the biggest drops in the past two decades. To put the recent drop into perspective, the indicator fell by about 80% during the global financial crisis and the bursting of the dot-com bubble.

The region’s technology stocks have become cheaper following recent losses, a factor that could help boost their appeal among investors. As the earnings consensus rises and prices fall, the valuation on the Bloomberg indicator – measured by the forward price/earnings ratio – has fallen below its 10-year average.

But despite all the optimism, investors are also hedging their bets. Demand for protection against a further drop in shares of TSMC and Samsung has increased this week, while volatility skew in the former has risen to close to the most bearish level since May last year.

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–With assistance from Sangmi Cha.

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