Morgan Stanley Contrarian Bullish: Asian Chip Stocks Poised to Catch Up with US Chip Stocks

This year, the AI boom has driven up the stock prices of American chip companies such as NVIDIA, while Asian chip stocks have not benefited much. However, a fund manager at JPMorgan Chase recently went against the trend and predicted that the rise of Asian chip stocks will catch up with their American counterparts.

Oliver Cox, co-manager of the $1.4 billion JPM Asia Pacific Equity Fund, expects that investors' pricing will begin to reflect that Asian companies are receiving more AI orders, which will drive up their valuations in the second half of this year.

Cox believes that AI has the potential to be a greater driver of profit growth for Asian companies, and the AI order frenzy in the region may continue throughout next year. This will sound the alarm in the market, as the overall trading of Asian chip stocks catching up with the US market will be reflected in their earnings.

Cox pointed out that in addition to being more attractive in terms of valuation compared to American chip stocks, Korean chip suppliers may also benefit from soaring product prices due to the increased demand for high-bandwidth memory caused by AI technology, which may lead to a shortage of DRAM memory next year.

Since the beginning of this year, the Bloomberg Asia Pacific Semiconductors Index has risen by about 23%, about half the level of the overall US chip stocks. The index's 12-month forward P/E ratio is nearly 5 percentage points lower than the Philadelphia Semiconductor Index, the largest gap since 2017.

Prior to Cox's statement, TSMC's stock price plummeted after lowering its full-year sales guidance on Thursday. TSMC now expects a 10% decline in sales this year, compared to the previously expected low single-digit decline. This has raised concerns among investors that the downturn in the chip market may last longer than previously anticipated.

TSMC's stock fell more than 5% in the US market on Thursday, and its stock price in Taipei fell more than 3% on Friday. Some media outlets reported that TSMC's stock price experienced its largest decline in over five months. However, TSMC's stock price on the Taiwan Stock Exchange has still accumulated a gain of over 20% since the beginning of this year.

Public data shows that Cox's JPM Asia Pacific Equity Fund recently increased its holdings of Asian chip stocks, with increased exposure to Samsung and Taiwan's Xinxing Electronics in June. The fund has achieved a return of 7.1% this year, outperforming 86% of similar funds.

Earlier this month, Morgan Stanley raised its ratings on the chip industries in China and Japan, and raised the target prices for Samsung and SK Hynix in South Korea, showing a more positive outlook for the long-term prospects of chip stocks in these three countries. Their analysts believe that the deflation in the tech industry, combined with the long-term demand brought by AI, will jointly drive the next logical upturn in the semiconductor industry.