Morgan Stanley warns of AI hype or cooling; Asian tech stocks, including TSMC (US), face their toughest post-pandemic test
After strategists at Morgan Stanley suggested investors profit from the AI boom, Asian tech stocks are poised for their worst sell-off since the early days of the pandemic.
Investors began to worry about the sustainability of the hot AI trade and the potential for a tightening of restrictions in the US last week, with the Bloomberg Asia Pacific Semiconductor Index falling 3% for the week, the biggest four-day drop since March 2020.
Morgan Stanley is shifting towards defensive consumer staples ahead of the Fed’s first cut, which it expects in September. The firm has downgraded Asian and emerging market tech stocks to equal weight, removing key AI chip stocks such as TSMC (TSM.US) from its focus list.
“It’s time to take profits”, said Jonathan Garner and others in a note, with tech stocks looking overbought and expensive. “We note that historically, Asian market leadership changes have occurred prior to the Fed’s first cut.”
This is the first downgrade of tech stocks by Morgan Stanley since it raised them to overweight in October 2022. Strategists said the contrast was that consumer staples were “less stringent” in their outlook to 2026 and had “the defensive characteristics of a global growth slowdown”, the first time the firm has upgraded consumer staples to overweight in at least five years.
The global AI stock rally, led by Nvidia (NVDA.US), wavered last week as investors reassessed the potential for further gains amid a policy shift at the Fed and the looming US presidential election. That drove a rotation to laggards such as consumer and small caps.
Among the stocks that Morgan Stanley removed from its key recommendations list, besides TSMC, were SK Hynix, the South Korean memory maker, and Tokyo Electron, a chip equipment maker, all of which fell more than 2% on Monday.
This is not to say that the firm has given up on tech. Strategists said that while the chip stocks look particularly frothy, “the imminent AI smartphone cycle” is a key point of interest, with Foxconn (2317.TW) and Hon Hai Precision (2311.TW) among the stocks on their watchlist.
Shawn Kim and Charlie Chan wrote in another note: “We are not calling ‘the end of the cycle’ — but it is important not to overlook the normal cyclical nature of the semiconductor market when everyone is focused on shortages and talking about new AI paradigms.”