(Bloomberg) — Technology stocks in Asia are facing their worst selling pressure since the early days of the pandemic after Morgan Stanley strategists urged investors to book profits on the artificial intelligence boom.
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The fresh selloff in stocks comes on the back of concerns over the sustainability of last week’s AI trading frenzy and possible tougher U.S. restrictions on technology sales to China. The Bloomberg Asia Pacific Semiconductor Index is on track to fall as much as 3% on Monday, its worst four-day drop since March 2020.
Morgan Stanley is recommending a shift into consumer staples ahead of the first expected Federal Reserve interest rate cut in September. The bank lowered its view on Asian and emerging market tech stocks to equal weighting and removed key AI chip sector names, including Taiwan Semiconductor Manufacturing Co., from its investment list.
“Now is the time to wait and see as tech stocks look overbought and expensive,” strategists led by Jonathan Garner wrote in the report. “We note that historically, a shift in leadership in Asian markets has tended to precede the first Fed rate cut.”
The downgrade of tech stocks marks the firm’s first since upgrading the sector to overweight in October 2022. In contrast, the consumer staples sector has a “less challenging” outlook through 2026 and “typical defensive characteristics amid a global growth slowdown,” the strategists said, raising their view on the sector to overweight for the first time in at least five years.
The global boom in AI stocks, led by Nvidia, faltered last week as investors reassessed the potential for further gains amid shifts in central bank policy and the looming U.S. presidential election, fueling flows into consumer stocks, small caps and other market laggards.
Besides TSMC, other stocks Morgan Stanley removed from its list of key recommendations include South Korean memory maker SK Hynix and semiconductor manufacturing equipment maker Tokyo Electron Co. All three were down more than 2% on Monday.
That doesn’t mean the company is abandoning technology entirely: Semiconductor stocks have been particularly overheated, but the “impending AI smartphone cycle” is a key focus, the strategists said, adding Samsung Electronics Co. and iPhone assembler Hon Hai Precision Industry Co. to their continued watch list.
“While we are not advocating the ‘end of the cycle,’ it is important not to lose sight of the normal cyclical nature of the semiconductor market amid all the attention on discussions of shortages and new AI paradigms,” analysts including Sean Kim and Charlie Chan wrote in a separate report.
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