MPI, CTOS are RHB's top sector picks

KUALA LUMPUR: RHB Investment Bank Research has downgraded the technology sector to “neutral” from overweight, after factoring in the semiconductor sector’s weakening demand, which is likely to persist, notwithstanding the gains from the strengthening US dollar, and growth in certain sub-segments.

“The US Federal Reserve’s extended hawkish pivot will continue to dampen sentiment on equity valuation as a whole, more so for high-growth sectors like technology.

“Key events that may alter our view include a demand surge post-China’s reopening, softening of inflation, and a further slowdown in demand amid recession fears,” RHB said in a report.

The research house noted that major semiconductor giants have guided for prolonged weakness beyond the third quarter as the weakening in demand and inventory correction intensified (especially for consumer products), largely affected by rampant inflation, geopolitical tensions, China’s lockdowns, and weaknesses in Europe.

Global semiconductor sales growth also reached an inflection point in August 2022, ending 30 months of consecutive growth.

In addition, it said the Chips and Science Act of 2022 may deepen the divergence of supply chains into the US versus China in the next decade, potentially causing an overcapacity situation and cost escalation in the long run.

“Fortunately, Malaysia – a neutral ground in South-East Asia – stands to benefit from supply chain and relocation efforts by multi-national corps to diversify out of China,” RHB said.

The research house advised investors to seek names with exposure to front-end players, as the outlook remains solid, benefiting engineering support services players.

“Orders for chips related to automotive, server, and high performance computing remains solid, benefiting players that focus on these sub-segments, as weaknesses are prevalent in consumer products, smartphones, and Internet of Things (IoT) devices, where inventory correction is taking place,” it added.

RHB’s top picks are Malaysian Pacific Industries Bhd, CTOS Digital Bhd and Coraza Integrated Technology Bhd.