Three pieces of advice HSBC has for AI investors
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Investors should pay more attention to areas of the tech sector with the strongest monetization and less-stretched valuations, particularly in South Korean memory chips and Taiwanese semiconductors, as well as semi-equipment and power infrastructure spaces in mainland China, HSBC said. "These markets provide exposure to areas where demand remains strong and capacity remains constrained, while valuations are generally less stretched than across parts of the US AI complex," according to a note from strategists led by Head EM and Global Equity Strategist Alastair Pinder. While there has been a recent correction in stocks of Korean memory chipmakers, fundamentals remain supported by capex-driven demand and shareholder returns are also rising, HSBC noted. "We are seeing signs that most of the selling pressure has now subsided," the bank said, adding that this should help reduce volatility, lower the cost of equity and support valuations throughout the sector. Tech stocks have been seeing heightened volatility in recent months, with South Korea's semiconductor-heavy market whipsawing between steep losses and record gains. HSBC is also bullish on Taiwan semiconductors. The bank reckons that the next stage of the AI trade in Taiwan would be to broaden beyond graphics processing units, as custom application-specific integrated circuits are increasingly being used by hyperscalers. "Persistent capacity constraints should support both pricing and utilization even as packaging investment accelerates," the bank noted. In mainland China, HSBC prefers domestically focused AI semiconductor and hardware stacks, as policy support, localization and inference growth are helping to fuel demand. "Rapid inference growth increases compute requirements and restrictions on foreign GPUs accelerate localization," HSBC said, adding that this provides some level of diversification from Taiwan and Korea, where earnings remain more directly exposed to the U.S. hyperscaler capex cycle. "China remains supply-constrained but less efficient local chips can actually broaden demand for packaging/networking/power," it added.