Asian Equities: The Straight Talk

. The US-China tech war is hotting up again?

 
Yes, and I don’t see the dynamics changing any time soon. This is not a new development but the pace has accelerated, although US measures seem limited to advanced semiconductor technology for now. Noise around this is likely to increase, given the looming US mid-term elections in November. We are keeping a close eye on this, and we are mindful of the potential impact on the stocks that we own.

As a result of this, China has also accelerated its multi-year localisation drive, which is creating new opportunities and room for growth across several industries, where the market share of domestic players is still not that significant.
 

Q. Aside from geopolitics, what are the most pressing challenges for the sector?

 
Recession risk and inventory correction. The overall environment remains cloudy, and the focus right now is on how deep and long a recession will be and we’ve not reached that stage of talking about when growth will return just yet.

The current expectation is that this should be a normal inventory correction over a few quarters, but until there is more clarity on how this pans out, I’m still cautious. So I think we might need at least a quarter or two to have a better feel of as well as more visibility around all this.

Q. Consumer demand is also weakening. Is there a risk of a hard landing for the sector?

Yes, but this is largely limited to the consumer segment, which is already correcting as we speak. There is a possibility of weakness in servers, autos and equipment, and we would expect a soft landing if that happens.
 

Q. What are you doing with the tech exposure in Asia Dragon Trust?

 
Since the first quarter of 2022, we have reduced our active weight to the technology sector in the Asia Dragon Trust, as we are growing more cautious about the outlook for end-demand.

At current valuations coupled with expectations of a normal inventory correction cycle, we feel that we have sufficiently de-risked our technology exposure.

When would we turn more positive? I think we would need clearer visibility that the cycle is developing as we have expected.

We continue to like the companies we hold, such as TSMC and Samsung Electronics, for their technology, proven and deep management teams and solid balance sheets.

We remain positive on the technology sector over the longer term, given supportive structural and policy tailwinds.
 

Q. TSMC and Samsung are portfolio mainstays. Are there other holdings that merit more attention?

 
We also like Taiwan’s Andes Technology. It is among the top three companies globally for RISC-V, an open source instruction set architecture (ISA) that defines the way software talks to a processor.

We see RISC-V gaining market share from players who use x86 ISA such as Intel and AMD. This is because RISC-V is a fundamentally simpler ISA with better power-performance-area attributes, which enable RISC-V users to design processors and other chips that are compatible with software designed for it.
 

Q. How do you see the sector shaping up over the long term?

 
Very well, in spite of our short-term caution. Asia is at the forefront of emerging technology themes, such as e-commerce, 5G, semiconductors and auto electrification. All this means that prospects for high-power computing, data centres and servers remain compelling, while AI complexity would boost semiconductor demand and overall market expansion. Autonomous driving is also likely to be a new growth engine.

I think there is more money to be made in the sector for a long time to come.
 

 

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