Top Taiwan Tech Fund Says There’s Still More Juice in AI Rally

(Bloomberg) — A top-performing Taiwan tech fund expects sustained demand for AI to keep driving an upward trend in the semiconductor cycle, despite growing doubts that valuations in the sector are too hot.

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The NT$1.37 billion ($42 million) UPAMC New Asian Technology and Energy Fund, run by Uni-President Asset Management Corp.’s Sam Kuo, is up 45% this year, according to data compiled by Bloomberg. It’s outperformed 98% of peers. The fund’s biggest holdings include Nvidia Corp., Taiwan Semiconductor Manufacturing Co. and Micron Technology Inc.

“We don’t think we see a tech bubble happening right now,” said Kuo. Some stock valuations may even increase iu60% to 70% this year even though their profits have are only revised up by 20% to 30%, leaving room for earnings to catch up, he added.

Technology shares have been in a downturn on fears that worsening US-China relations may result in tougher trade restrictions on semiconductors, as well as a recent rotation away from larger-cap equities. The increasing odds of Donald Trump winning a second term as US president are adding to fears of more geopolitical and trade risks.

Kuo said that tensions between the US and China are one of the key reasons why he sees more opportunities in Taiwanese and Japanese stocks, and so has cut his exposure to China. About 60% of the fund will continue to be allocated to Asia, Kuo said, adding that it’s more focused on higher-quality companies tied to AI rather than companies linked to consumer electronics.

While chip stocks have been on a tear this year, with the Bloomberg World Semiconductors Index up about 53%, some strategists see signs of overheating. For example, Nvidia got a rare downgrade from New Street Research after its recent rally. The company is currently trading at a price to earnings ratio of 71 times.

Kuo said the valuation issue is not a major concern to him, as he believes a company’s earnings are the “most important thing.” Over time, he sees tech profits continuing to increase and valuations eventually returning to normal.

Last week, TSMC announced its quarterly earnings, which beat estimates, and lifted its revenue projections for 2024 on confidence in the longevity of the global AI spending boom. Other big Asian names in the sector to report earnings soon include Tokyo Electron Ltd. in early August.

In addition to straight AI or semiconductor stocks, Kuo also has his attention set on industrial companies that are related to these fields. One example among the fund’s top holdings is Meidensha Corp., which makes light machinery including power generation and water treatment systems.

“When we think about the AI chain, it’s very easy for investors to think about semiconductor equipment and materials, but at the same time, we are looking at the electricity shortage issue,” Kuo said. “So we do look for opportunities to invest in grid equipment in Korea and in Japan.”

Now, with much of the news cycle dominated by politics, Kuo said that AI is ultimately immune, whatever the outcome of the US election.