Take profit in these tech stocks or risk 20% drop, warns Morgan Stanley

by Charlotte Yang

Investors should take profit in Asian technology stocks amid trade-related risks, elevated valuations and lack of earnings upside, according to Morgan Stanley.

The sector has around 20% near-term downside should tariffs increase on computer chips and trade tensions re-escalate, analysts including Shawn Kim wrote in a note. What’s more, they think current consensus earnings estimates are too high.

“Lower broader tech exposure in the near term and hedge sector exposure,” the analysts wrote. Headwinds for the sector “add up to poor near-term risk-reward.”

Global investors’ enthusiasm over artificial intelligence has been a boon to Asian technology stocks, with a gauge tracking semiconductor shares in the region gaining more than 65% since the end of 2022. But that has also extended valuations, while earnings-per-share estimate revisions “have not seen meaningful improvements,” according to Morgan Stanley.

At the same time, US President Donald Trump has said he expects to levy more tariffs on foreign production of computer chips and semiconductors. A round of geopolitical spats in 2018 sank shares in the sector, the analysts noted.

They do, however, see a few bright spots in the equity market.

“We favor Internet and Chinese domestic semi stocks over exposure to global semis,” they said. Chinese foundries and equipment companies including Naura Technology Group Co., Semiconductor Manufacturing International Corp. and Hua Hong Semiconductor Ltd. should benefit from trade tensions due to their higher domestic sales exposure, they said. 

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