Mean reversion. Global technology stocks experienced a knee-jerk sell down as investors rotated away from high growth pricey technology stocks to values and cyclicals, in anticipation of potential knock-on effects on growth amid the Fed hawkish stance to tame inflation coupled with the Russia-Ukraine war. Tracking the Nasdaq slump, KLTECH had plunged 29% YTD, being the worst-performing sector on Bursa Malaysia. Companies under our coverage, such as INARI, KOBAY and FRONTKEN, have since tumbled average 37% YTD and 41% from 52-week high. Despite lingering external headwinds, we believe these risks are mostly priced in by the market, reflected by the mean reversion in KLTECH from the peak of +2SD to mildly below its 5-year mean forward P/E (Figure #1). We believe the current route on KLTECH is tactically driven instead of a major fundamental change.

Still in expansion mode. Technology sector is expected to continue expanding in 2022, despite the tremendous growth in 2021. According to SEMI’s forecast, 2022 total equipment spending is slated to register another 6.2% growth to USD101.3bn after registering a whopping 18% surge in 2021 to USD95.3bn, making a third consecutive year of growth, premised on the ongoing chip shortage and national strategic interests. On the other hand, WSTS expects the semiconductor sales to advance another 8.8% in 2022 with a decent growth across all segments (Figure #2). The combination of accelerated demand in semiconductor during the pandemic with new technology such as 5G, artificial intelligence, IoT and autonomous driving getting prevalent coupled with the lagging supply due to supply chain bottlenecks continue to weigh on the imbalance supply and demand dynamics. World well-known foundries such as Global Foundries and Intel believe the current semiconductor shortage will not be resolved in 2022, while Samsung believes the shortage will last until 2H2022, particularly the RF chips.

Overweight call on Technology. All in, we expect technology sector to experience multiyear earnings growths supported by fundamental exponential demand and further enticed by government incentives. HLIB reiterates an Overweight rating in tech sector with tactical position in favour of front-end players as many countries have rushed to develop their semiconductor capabilities, especially in leading edge (≤7nm) frontend fabrication (foundry) to be self-sufficient on the back of national strategic and security interests. In the wake of recent share prices’ slide whilst fundamentals remain largely unchanged, we opine the risk and reward for the tech sector had turned favourable for long term investors to nibble.

Poised for further technical rebound. After plunging 37.9% from all-time high of 101.27 (22 Nov 2021) to 62.93 (8 Mar), KLTECH index staged a 6% technical rebound to end at 68 yesterday (-29% YTD). Given the bullish long white candlestick pattern and uptick in technical indicators, the benchmark is likely to advance further to retest 70-76 levels. A decisive breakout above 76 may lift the index to retake YTD high of 86 levels. Key supports are hovering at 55-60-63 zones.

Source: Hong Leong Investment Bank Research - 10 Mar 2022