KUALA LUMPUR (July 24): Morgan Stanley Research said the prospect of a full-blown trade dispute (between US and China) grew last Friday (July 20), after the US rhetoric on the will to impose duties on all Chinese imports.
In an Asia Pacific technology (tech) sector report July 22, Morgan Stanley said as global growth resets, the sector performance is vulnerable to rotation, earnings risk, and non-tariff measures.
“We prefer domestic semi and Internet exposure,” the report said.
The research house said tariff exposures for tech have been minimal, but confidence is likely to deteriorate further.
It listed four impacts on the Asian tech sector: stock market rotation; earnings risk; non-tariff measures and valuation under pressure.
Under stock market rotation, the research house said technology stocks do not provide a safe haven.
“Stock leadership should continue to narrow toward domestic exposures that have room to grow, such as Internet, as investors move to safer plays,” Morgan Stanley added.
For earnings risk, the research house said it has detected minor downticks in orders from the supply chain, reduced capex, and more caution from the earnings season.
“Trade damage to global growth would eventually reduce overall demand for tech. Costs also go up as tariffs flow through the supply chain,” Morgan Stanley said.
Non-tariff measures by China in the form of prohibition of US goods or brand consumption, present greater risk, it added.
China could tighten laws and approval rules and make it more costly to run operations, the report said. Previous restriction on Korea (defense issues), Japanese autos (territorial disputes), and France (Carrefour) are examples.
Meanwhile, reducing tech exposure heightens risk of derating, it said, as seen in the US-Japan trade dispute three decades ago, which resulted in sharp multiple contraction and a blow to earnings growth.
“The US-Japan semiconductor trade dispute in the 1980s-1990s ended with large concessions by Japan. Today, the US is employing similar trade tools against China,” the report added.
Morgan Stanley opines it makes sense to lower broader tech exposure in the near term, as well as to hedge sector exposure into earnings season.
“Elevated valuations, lack of material earnings upside, extended positioning, technicals, and trade-related risks, all add up to poor near-term risk-reward.
“We reiterate our positive views on Internet and Chinese domestic semi stocks,” it said.