Amundi says Asian tech stock rally faces Federal Reserve risks but bubble has not formed yet

Source: Global Market Report

Amundi, the largest asset management company in Europe, stated that the bull market in Asian equities driven by artificial intelligence (AI) still has further upside potential, unless changes in US interest rate expectations impact the mega-cap companies supporting this investment cycle.

"We do not believe there is a bubble," said Alessia Berardi, Head of Global Emerging Markets Strategy at Amundi, in an interview. She was referring to the record share price increases of Korean and Taiwan tech companies such as Samsung Electronics and SK Hynix. "Market expectations for these companies' earnings are very high. Relative to their earnings forecasts, current valuations may still be reasonable." Amundi has assets under management worth 2.4 trillion euros ($2.8 trillion).

Berardi noted that this suggests high share prices and demanding earnings expectations are unlikely to hinder the rally in Asian semiconductor, hardware, and supply chain companies. By 2030, AI infrastructure spending is projected to reach $5 trillion, and hardware suppliers supporting these networks still have significant upside potential.

The current rally is remarkable. Year to date, the Korea Kospi index has surged nearly 100%, despite a nearly 7% drop on Friday, with individual stocks like SK Hynix and Samsung Electronics gaining even more. Tech stocks have been the main driver behind the 25% increase in this major emerging market index this year.

Whether this rally can continue ultimately depends on whether US tech giants will keep increasing their investments in AI. This investment cycle is highly dependent on the Federal Reserve’s interest rate decisions. Currently, traders are betting that the Fed’s next move will be a rate hike to address persistently high inflation.

Rising Treasury yields will push up borrowing costs and investment thresholds, which could pose challenges to AI-related capital expenditures.

"The outlook remains highly dependent on the US investment cycle," Berardi said. "US interest rates and yields are still crucial for tech investment, and any change in Fed expectations will eventually impact Asian tech stock trading as well."