US Chip Export Controls Spark Volatility in Semiconductor Sector
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The US has reportedly ordered Taiwan Semiconductor Manufacturing Co (TSMC) to halt shipments of advanced chips used in artificial intelligence (AI) applications to mainland Chinese customers. The restrictions, detailed in a Department of Commerce letter, apply to chips with designs of 7 nanometers or more advanced.
This latest move follows similar restrictions imposed in October 2022 on NVIDIA, AMD, and equipment makers, which were later expanded into broader rules.
UBS, in a note published yesterday, anticipates increased volatility in the broader semiconductor sector as more details on the latest round of export controls emerge. Potential tariffs under President-elect Donald Trump's second term could further exacerbate market uncertainty. However, the investment bank remains optimistic about the long-term prospects of quality semiconductor companies with exposure to the AI growth story.
"Without taking any single-stock views, we continue to believe solid fundamentals should provide support for quality semi names with exposure to the AI growth story," UBS states.
The firm believes that investors will ultimately refocus on company-specific fundamentals once the uncertainty surrounding the export controls is resolved. In both 2022 and 2023, the Philadelphia Semiconductor Index experienced sharp corrections in October due to similar export control concerns, but chip stocks rebounded in subsequent months as the impact proved manageable.
"We believe investors will look beyond the headlines and assess the company-specific impact when details become available," UBS notes.
Despite the near-term volatility, UBS points to the continued strong commitment from big tech companies to invest in AI as a key driver for semiconductor companies exposed to the AI trend. The investment bank expects their combined AI-related spending to grow by 50% this year to USD 222 billion and another 20% to USD 267 billion in 2025.
"The biggest beneficiaries of big tech’s robust AI spending, in our view, are companies exposed to AI semis, especially in areas like graphics processing units (GPUs), custom chips, and high-bandwidth memory," UBS states.
UBS also highlights the accelerating adoption and monetization of AI, citing recent tech earnings reports that showcase strong cloud revenue growth and management comments indicating increasing AI adoption and efficiency gains across various industries.
"We maintain our positive view on AI and believe the technology will continue to drive growth in the years ahead," UBS concludes.
The firm suggests that investors with low AI exposure may consider structured strategies to build long-term allocations, while those with high exposure may want to explore capital preservation strategies to navigate the current market volatility.