When the sell-down occurred, TA Research on Wednesday issued a report upgrading technology stocks to “overweight,” noting that growth is still seen in the sector despite the sell-down.

TA Research notes that the Bursa Malaysia’s Technology Index, which is down by some 25% in the year to date, presents some buying opportunities.

“We have a buy recommendation on Inari Amertron Bhd

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(target price (TP) of RM3.65), Elsoft Research Bhd

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(TP of RM3.30), Malaysian Pacific Industries

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Bhd (TP of RM10.70) and a hold recommendation on Unisem (M) Bhd

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(TP of RM2.55),” TA’s analyst Wilson Loo says in the report.

 

“That said, we view recent trade tensions between the US and China to be a key risk to the sector with the USA expected to soon outline a list of technology imports from China to impose tariffs on.

“Our top pick for the sector is Elsoft. We like the stock for its strong order book, rich margins and research and development capabilities,” Loo adds.

The fundamental picture seems okay, as Loo notes that statistics show that global semiconductor sales extended its run for the 19th consecutive month with year-on-year (y-o-y) growth in Feb 2018, growing by 21% y-o-y but -1.5% month-on-month to US$36.8bil.

“The marginal m-o-m decline was in line with seasonal trends. Growth was broad-based across semiconductor categories and we believe this was driven by higher demand and average selling prices for memory (DRAM and NAND flash),” Loo says.

World Semiconductor Trade Statistics has forecasted an industry growth at 7.0% (vs 21.6% in 2017) with growth being led by memory at 9.3% for this year.

An analyst says that buying catalysts would emerge in the local tech space again if the US backtracks on their threats to target China’s IT industry, since it would hurt their own interests as well.

“All these tariffs have not been set in stone yet and is still subject to a public hearing. If it’s allowed to proceed, tariffs will still affect the global semiconductor chain players and they might experience lower demand due to higher prices.

“But if this happens, consumers can also opt for a substitute brand,” he says.

Dealers however have a different take on tech stocks saying that the macro outlook does not look too good and notes that any short term technical rebound could be vulnerable to further sell down.

“Keep in mind that the tech stocks are now being affected by sentiment and there might be a rebound, but tech is coming off a very high base.

“US President Donald Trump also continues to be carefree with his comments, not being prudent and US stock futures are down as of now – this will have an adverse impact on tech stocks. US markets are back to test its old support zone of the 200-day moving average,” a dealer says.

“This zone continues to be tested and tested. But any breakdown from this key support zone doesn’t bode well for the markets in general since tech is a high-beta growth area.

“Bear in mind that Trump had a positive effect on US markets after the time he was just elected and the reverse could happen now,” the dealer notes.

MIDF Research says that if the trade war continues to intensify, it would invariably negatively impact the earnings prospects of semiconductor companies.

“Nonetheless, our channel checks indicate that there is no change to volume order at this juncture.

“Should the trade war intensify, we do not discount the possibility that future earnings outlook of these companies could be affected. Pending further developments, we are maintaining our neutral recommendation on the sector,” MIDF Research says.

MIDF Research also notes that the growth rate of monthly worldwide sales of semiconductor have trended lower in February 2018 due to the high base effect in the previous year.

Despite anticipation that growth rate for the industry in 2018 would taper off to single digits, the research house expects demand for semiconductor products to remain robust, being backed by new smartphone launches, expected recovery in the tablet market, and stable demand from the automotive industry.

“Capital spending will continue to growth, albeit at a slower pace. We view that this could negatively impact the dividend payout ratio,” it says.

In the bigger picture, it is interesting to note that while uncertainties in the tech space could bring about opportunities for longer term investors, stocks in this sector would remain strongly influenced by what is developing in the markets as a whole given their high correlation.

The markets are after all correcting from a multi-year uptrend since the 2008 global financial crisis. The outlook as a whole for the local tech space is indeed mixed and buying opportunities will largely depend on an investor’s time horizon and appetite for risk.