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What Could Go Wrong With This Strong Confidence in Asia Tech

What Could Go Wrong With This Strong Confidence in Asia Tech

(Bloomberg) -- Wednesday’s slump in technology shares may be a timely reminder of how much and how fast the sector’s shares have risen. While enthusiasm around tech shows little sign of abating, the pace of progress toward rolling out 5G technology and ending the trade war was identified by some market participants as a potential threat to its strength.

For Felix Lam, a senior Asia-Pacific equities fund manager at BNP Paribas Asset Management in Hong Kong, the key issue to watch in 2020 is whether 5G handset shipments can meet investors’ bullish expectations.

The shipments are expected to surge to as many as 200 million units this year from 6.7 million units in 2019, Lam wrote in an email. While 5G penetration will undoubtedly be strong, Lam said he’s more confident that data center recovery will emerge as an investment theme as expectations of a rebound are “mild.” Because of this, he favors South Korea’s semiconductor stocks over hardware names in Taiwan, which has more 5G-related hardware companies.

Also read: 5G Smartphones to Hit Prime Time in 2020, Bloomberg Intelligence Says

In addition, prices of 5G handsets remain too high, according to a Sanford C. Bernstein note last week that predicted their shipments may have a slow start in the first quarter as high prices may lead to weaker-than-expected demand.

And the potential of trade friction derailing expectations can’t be overlooked. Reuters reported that Washington has drafted a rule allowing it to block exports to Huawei Technologies Co. should U.S. components comprise more than 10% of product value. The MSCI Asia Pacific Information Technology Index slid more than 1% after the news, weighed by chipmakers Taiwan Semiconductor Manufacturing Co.

What Could Go Wrong With This Strong Confidence in Asia Tech

The U.S. already blocks exports of many high-tech products to China from other countries when U.S.-made parts make up more than 25% of the value. If the latest proposed rule were enacted, the impact would be “too big to ignore” and affect the region’s chip giant TSMC, according to the Bernstein note from analysts led by Mark Li.

The smartphone supply chain would face a greater excess inventory adjustment risk if the measures take effect, according to a Morgan Stanley note published Wednesday. Companies with exposure to Huawei but limited exposure to Samsung Electronics Co.and Apple Inc. will particularly be affected due to a potential shortfall in Huawei’s production, analysts led by Shawn Kim wrote, adding that foundry, analog semi, PCB substrate and smartphone components would be the most impacted.

“Investors need to be more selective in picking tech stocks as the U.S.-China trade war could produce winners and losers over the longer run,” wrote BNP Paribas’s Lam, who considers the overall sector “attractive.”

--With assistance from Cecile Vannucci.

To contact the reporter on this story: Moxy Ying in Hong Kong at yying13@bloomberg.net

To contact the editors responsible for this story: Lianting Tu at ltu4@bloomberg.net, Margo Towie, Naoto Hosoda

©2020 Bloomberg L.P.