Monday, December 23, 2024

UBS issues shopping list for investors amid tech volatility

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Tech stocks have been going through a rout as fears of a US recession sparked a Wall Street sell-off that wiped $279bn of Nvidia (NVDA) alone in one single day. Despite the ongoing volatility, UBS (UBS) is advising investors to see this as a strategic moment to refine their technology portfolios — whether by making selective purchases or offloading certain assets.

Mark Haefele, chief investment officer at UBS Global Wealth Management, recommends investors assess their portfolio’s technology and AI exposure.

Those with lower AI allocations might consider building exposure through structured strategies to navigate potential volatility, while those with higher allocations could explore capital preservation strategies as a hedge against further market turbulence.

“Semiconductor capital expenditure remains promising,” Haefele noted, though he acknowledged that some areas of the industry are more appealing than others. Nvidia’s recent earnings, which exceeded consensus estimates but fell short of loftier expectations, sent mixed signals to investors.

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However, Haefele pointed out that the broader semiconductor sector could find support in the coming quarters due to robust order books and an expected increase in AI-related capital expenditures, which, despite their recent growth, are still below historical peaks.

UBS suggests a targeted approach within the semiconductor space, prioritising AI logic chips where valuations have become more reasonable. Quality foundry stocks also appear attractive, with UBS expecting sustained earnings growth.

At the other end of the sector, memory chip stocks, which are typically more volatile, may struggle in the current market and face heightened regulatory risks from the US. Chip manufacturing equipment makers, heavily reliant on revenue from China, are seen as the most vulnerable in the near term due to increasing export restrictions.

Looking beyond semiconductors, UBS sees potential in quality large-cap technology companies, particularly those that are beginning to show returns from AI investments. While sentiment around large-cap tech has softened, second-quarter results were solid, and global tech earnings growth is projected to reach 15% to 20% over the next six quarters.

Companies like Microsoft (MSFT) and Meta (META) are leading the way in AI monetisation, with Microsoft anticipating faster cloud revenue growth and Meta aligning its investments with substantial monetisation opportunities.

Read more: Investors buying the dip as Wall Street rout makes stocks cheaper

Valuations for mega-cap tech stocks have also become more attractive, currently trading at around 27 times next year’s earnings — approximately 15% below their recent peaks. UBS maintains a preference for quality tech companies with strong secular growth and resilient earnings, supported by solid fundamentals and robust free cash flow.

In the smartphone sector, supply chains may see a boost from the upcoming replacement cycle. Apple (AAPL), in particular, has shown relative resilience, with its shares holding up well ahead of the seasonal iPhone launch. UBS notes that supply chain checks suggest a launch preparation in line with last year, with the potential for a 5% to 10% increase in orders if demand is strong.

UBS favours companies within the smartphone supply chain that have pricing power and industry leadership while remaining cautious on lower-quality hardware firms that could face margin pressures.

UBS says that tech volatility is likely to persist in the near term but remains confident in the long-term investment case for AI.

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