The wealth management arm of the banking group gives reasons why it thinks investors could stay positioned for upside to global tech, reflecting on the recent sharp drop – and recovery – in equity prices.

The recovery in tech shares since the sharp selloff on August 5 has further to run, and spending on artificial intelligence will continue to grow, UBS argues in a note.

The bank’s wealth management group said that with some 15 to 20 per cent earnings growth expected for the tech sector over the next six quarters, there is a “compelling risk-reward outlook for global tech.”

“We believe that AI should continue to drive growth in the years to come and that investors should ensure they have sufficient allocation to beneficiaries in the semiconductors and software industries. For those concerned about elevated volatility, structured strategies can be utilized for more defensive exposure,” it said. 

Global technology stocks have bounced back from their recent trough in early August. The Nasdaq index, for example, has rallied more than 10 per cent from its intra-session low on August 5, recouping more than half of its losses from the benchmark’s all-time high in July.

Concerns about a stuttering US economy and the high stock valuations of “Magnificent Seven” firms such as Apple, Tesla and Nvidia spooked markets almost three weeks ago. 

“Volatility could rise again until investors are convinced that the US economy isn’t slowing into a recession, and future gains could be more gradual amid risks around the US elections and geopolitical tensions,” UBS said. “But we believe the recovery in tech shares has room to run, and we see tailwinds from both fundamental and technical perspectives.”

“AI spending has more room to grow. Strong investments into artificial intelligence have propelled the tech rally this year, and big tech companies are on track to increase their capital spending by 43 per cent year-over-year in 2024,” it continued.

UBS said that in contrast to the general viewpoint, the level of capital expenditure intensity – capex divided by sales – for big tech remains below their historical peaks. 

“Our analysis shows that big tech’s capex could potentially increase by as much as 25 per cent in 2025 – much higher than the consensus projections of a 10 to 15 per cent increase. This strong capital spending outlook is especially positive for AI enablers in the semiconductors field,” it said. 

The bank said recent earnings' reports point to strong AI demand and increased adoption. For example, it gave the case of Taiwan Semiconductor Manufacturing Company (TSMC), which has reported 45 per cent year-over-year sales growth for July, accelerating from June’s 33 per cent year-over-year growth. A Taiwanese chip-testing and packaging company raised its planned 2024 capex by 57 per cent owing to rising AI demand, while another company that assembles AI servers for big tech issued a strong second half outlook on top of a record second quarter profit. 

Supportive
UBS said they should position in a “supportive” way. 

“The recent correction in tech stocks was partly due to the unwinding of yen carry trades, where investors borrow the Japanese currency at near-zero interest rates and invest in higher-return markets including global tech stocks,” it said.

“But these positions have largely been liquidated, with data from the US Commodity Futures Trading Commission showing that leveraged funds’ yen positions have shrunk to the smallest net short stance since February 2023. Other data showed that hedge funds and retail investors alike are re-entering the market, while corporate buybacks should soon increase as the earnings season concludes,” it added.