Asian IT: the global AI enabler

The information-technology sector in Asia is entering a very exciting stage. Profound disruptive change powered by generative artificial intelligence could reshape the world in the next 10 years, and Asian IT is the enabler. Technology hardware is our main pick among sectors in 2024 and the topic of the second in our four-part series on Asian equities.  
 

Entering mid-cycle

Asian IT caught many by surprise as the best-performing sector in Asia in 2023, rebounding from a drastic drawdown in 2022. This was attributed to 1) fast evolvement on generative AI post-ChatGPT launch, which triggered a new wave of tech spending despite economic challenges, and 2) a reduced possibility of a hard-landing scenario. For 2024, the Asian IT sector should continue to outperform as we are entering into mid-cycle driven by recovery in cyclical and non-AI IT demand, and inference and edge AI driving the next wave of AI spending in 2H24-2025. The upside is well-supported by earnings growth. Asian IT is expected to be a significant earnings contributor for emerging markets.

FIG 1. Asia Tech still has relative upside vs. MSCI Asia as we move into mid-cycle

Source: Refinitiv, Morgan Stanley Research, Note: Historical average is calculated using 2008 and 2016 cycle data.

FIG 2. Asia tech cycle – still 6-12 months to run

Source: Morgan Stanley.
 

Recovery in cyclical and non-AI demand

We believe the global semiconductor sector will start to grow in 2024 after a 1.5- to 2-year period of inventory digestion. The cautious enterprise spending sentiment in 2023 caused by both geopolitical events and higher rates is now easing, and we have seen a recovery in budgeting from global CIO surveys. Even with increasing AI spending, we believe devices including commercial PCs and general servers are at the end of their life cycles and need to be replaced. We do not expect explosive growth in overall cloud capex in the next few years, so we prefer players that could benefit from a multiyear structural increase in computing power demand – e.g., Jentech¹, which makes heat dissipation metal parts for all major high-performance chip vendors. 

Following a normalised inventory and improving demand, we expect growth for global semiconductors in the mid- to high-teens YoY in 2024. We think it’s too early to predict the peak, but our base-case scenario suggests the cycle will peak in H1 2025, assuming a soft-landing economy. We like cyclical commodities (Samsung and Hynix¹) and the leading foundry in the space (TSMC¹). We dislike legacy foundries as capacity overbuild may cause a lower peak in the coming upcycle vs. the last one. 

Inference and edge AI 

We are a long-term believer in AI and very excited about the upcoming multi-modal application in generative AI (voice-text, text-image, text-video), which requires 10x more parameters. However, we are selective at this stage as there could be a pause in expensive training capacity building before more user cases. We prefer inference and edge AI players. Inference is the process of running live data through a pre-trained AI model to make a prediction or solve a task, usually run by a less sophisticated server and hence, the supply chain is more fragmented. Edge AI refers to the end device that runs AI applications and is essential to bringing AI to the mass market.

FIG 3. LLM & AIGC updates and future trend 

Source: Nomura Research.

By Intel’s¹ definition, AI PC is “the new computer with the components that are specifically designed to run powerful AI-accelerated software with great performance and quality”². We believe the AI PC is likely to support PC replacement in 2025 and beyond. The first-generation device tends to be over-spec (in order to accommodate potential new AI functions in the next five years) and hence, should support the supply chain’s growth. We see a clear roadmap for PC CPU vendors to introduce new chips in 2024 and hence, a real AI PC is likely to be on the market by late-2024. Our preferred pick is Lenovo¹, the major commercial PC brand, and Parade¹, the high-speed interface chip supplier to PCs & peripherals.

FIG 4. AI PC: Usage examples

Source: Intel.
 

Most-liked industry

We believe the combination of a US soft landing, slowing global inflation and global monetary easing will mean riskier assets perform better in 2024. Among sectors, we like technology hardware the most, as shown by our stock picks in Korea and Taiwan. We continue to like AI and the supercomputing theme, where we expect monetisation as we head into 2024. 

sources.

1  Any reference to a specific company or security does not constitute a recommendation to buy, sell, hold or directly invest in the company or securities.
 2 What is an AI PC and How Can It Help Me? (intel.com)

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