Despite the challenging market environment, particularly across Asian equities, we remain constructive on the outlook for semiconductors and memory, which are at the heart of the Taiwanese and South Korean equity markets. Both markets have experienced a sharp correction in recent weeks, driven by concerns over the profitability of AI-related investments, compounded by political uncertainty following the Democrats’ victory in the US midterm elections. While we acknowledge these concerns, we do not believe they fundamentally undermine our investment thesis at this stage.
On the first point, our conviction remains unchanged. The market reaction to hyperscalers’ earnings was particularly harsh, especially for Alphabet and Amazon. Disappointments in Google's search business and Amazon's advertising segment dominated investors' attention, overshadowing the much stronger outlook for their cloud businesses, which are central to AI development (+103% YoY at Alphabet versus +89% expected, and +39% at Amazon versus +38% expected).
Admittedly, these figures do not resolve all the questions surrounding the profitability of AI investments. Ultimately, major technology companies will need to demonstrate their ability to monetise their infrastructure spending and generate satisfactory returns. Nevertheless, they point to exceptionally robust demand for computing power. Meeting this demand requires increasingly powerful processors and growing volumes of high-performance memory. These are precisely the segments in which Taiwanese and South Korean companies hold strategic positions. In our view, the investment cycle should therefore remain intact, even if its pace fluctuates, and continue to support Asian technology manufacturers.
The second concern relates to the political implications of the midterm elections. The Democrats' decisive victory has revived fears of tighter regulation of AI infrastructure, particularly data centres. However, we see little prospect of federal legislation that could materially constrain their development. Donald Trump will retain his presidential veto power until January 2029, significantly limiting the Democrats' room for manoeuvre.
At the state and local levels, tighter regulations remain possible, particularly regarding construction permits and energy supply. Nevertheless, we believe this risk should be put into perspective given American voters' priorities. According to a Harris Poll survey cited by Goldman Sachs, 36% of voters identified the cost of living and inflation as their most pressing concern ahead of the elections, compared with just 2% who cited artificial intelligence. In other words, AI regulation remains a relatively marginal issue in the broader public debate. This does not rule out local opposition to specific projects, particularly where their energy requirements could put upward pressure on electricity bills. However, we struggle to see this developing into a regulatory backlash severe enough to derail the broader investment cycle.
Overall, we believe the recent correction reflects a reassessment of market expectations and perceived risks rather than a genuine deterioration in fundamentals. Volatility may persist in the near term, but it does not alter our constructive outlook for semiconductors and memory in Taiwan and South Korea.
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