AI Stock Rout Has Investors in Asia Mapping Out Next Catalyst

(Bloomberg) -- Debate is raging on whether the AI rally has run its course but for some investors, another drawdown may be a chance to buy.

Money managers in Asia are on the hunt for their next purchase even after the region’s tech stocks recorded their steepest ever two-day drop this week, reflecting an unwavering confidence in a trade that has underpinned the upturn in global equities. Taiwan Semiconductor Manufacturing Co., Samsung Electronics Co. and SK Hynix Inc. are still attractive bets given the long-term prospects for AI remain undimmed, they say.

“Some of them definitely look a little bit more attractive to us than say, two weeks ago, given how much it’s fallen,” said William Yuen, investment director at Invesco Hong Kong Ltd. “The trend for us is to at least maintain these kind of tech positions, or if the opportunity arises given more sell down, then we will be adding.”

The debate strikes at the heart of a question that has dogged equities investors for months: has the red-hot AI trade finally reached an inflection point? Cracks are appearing as analysts question if the industry can live up to the hype, and whether returns will justify the hefty investments that have been plowed in.

Here are six charts to show the state of play, and why some investors are keeping faith in the trade:

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

Analysts have boosted their earnings estimates on key Asian chip stocks despite the recent rout, unlike the US where the consensus has been lowered since late July. Morgan Stanley reinstated TSMC as its top pick following the latest selloff, citing the company’s “quality and defensive nature during an elongated semi downcycle.”

“Price hike confirmation and ongoing AI capex strength should be key catalysts,” Morgan Stanley analysts including Charlie Chan wrote in a note on Tuesday. 

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

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

The Bloomberg Asia Pacific Semiconductors Index has fallen almost 20% from the high reached in July but the decline is relatively small compared to the largest drawdowns recorded in the past two decades. To put the recent drop in perspective, the gauge slumped about 80% during the Global Financial Crisis and the bursting of the dot-com bubble.

The region’s tech shares have become cheaper following the recent losses, a factor that may help boost their appeal among investors. As the earnings consensus rises and prices fall, the valuation on the Bloomberg gauge — as measured by the forward price-to-earnings ratio — has dropped below its 10-year average.

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

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--With assistance from Sangmi Cha.

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