Volatility in Technology Sector

Volatility in the technology sector may rise following the latest round of chip export controls by the US, according to UBS strategists.

The US has reportedly instructed Taiwan Semiconductor Manufacturing (NYSE: TSM) (TSMC) to stop supplying advanced chips used in AI applications to mainland Chinese clients as of Monday, November 11.

Per a Reuters report, the restrictions, outlined in a Department of Commerce letter, apply to chips with designs of 7 nanometers or more advanced.

TSMC’s US-listed shares fell more than 3% Monday.

This directive came shortly after the recent US presidential election, with markets already expecting further chip export controls during the fourth quarter.

The Department of Commerce initially introduced similar restrictions in October 2022, with a commitment to review these measures at least annually.

At that time, letters were also sent to companies like NVIDIA (NASDAQ: NVDA), AMD (NASDAQ: AMD), and equipment manufacturers, limiting their ability to export advanced AI chips to China. Those initial directives were subsequently formalized into rules impacting a broader group of companies.

UBS strategists note that volatility in the semiconductor sector is "likely to pick up as more details on the latest round of export controls emerge,” adding that possible tariffs under Donald Trump’s second term could lead to further headwinds.

However, without focusing on individual stocks, UBS remains confident that strong fundamentals will likely continue to support high-quality semiconductor names benefiting from AI-driven growth.

As uncertainty fades, UBS strategists expect investors to refocus on semiconductor fundamentals.

Past instances, such as in October 2022 and 2023, saw semiconductor stocks like those in the Philadelphia Semiconductor Index drop 15-20% amid export control fears but later rebound as impacts proved manageable.

“While the broader implications of the latest restrictions remain unclear at this stage, we believe investors will look beyond the headlines and assess the company-specific impact when details become available,” strategists led by Mark Haefele wrote.

Moreover, Big Tech’s commitment to AI investments remains a tailwind for semiconductor stocks tied to AI trends.

Major tech firms are projected to increase AI-related spending by 50% this year to $222 billion, with an additional 20% growth to $267 billion in 2025.

According to UBS, the biggest beneficiaries of elevated AI spending are companies exposed to AI semis, particularly areas such as graphics processing units (GPUs), custom chips, and high-bandwidth memory (HBM).

Strong AI demand is further reinforced by accelerating cloud growth and cross-industry AI adoption, strategists added.

Overall, they suggest investors should anticipate volatility and consider strategies to manage exposure. For instance, those with low AI exposure might use structured strategies for long-term gains, while high-exposure investors may look into capital preservation options.