High-Flying Chip Stocks Bear Brunt of Iran War Risk-Off Trade

7mh)]1989m5xrpi8vhwdar8b_media_dl_1.png Bloomberg

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(Bloomberg) — As investors brace for a protracted conflict in the Middle East, they’re electing to sell the technology stocks that have been among the market’s biggest winners in recent months.

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Memory chipmaker Micron Technology Inc. closed 9.9% lower Monday and slumped even further in post-market trading. Among peers, Samsung Electronics Co. slumped nearly 5% and SK Hynix Inc. dropped as much as 7.7% in early Korea Exchange trading Tuesday.

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Uncertainty over potential peace talks to end the US and Israel’s war against Iran is unsettling global markets, where signs of capitulation are growing. Tech shares, after years of gains on the artificial intelligence boom, are posting the steepest declines.

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The early narrative that tech would be immune is wrong, according to Jim McCormick, chief global macro strategist at Citigroup Inc. Markets have now had a wake-up call as “we’re looking at a world of sustained higher yields and sustained higher energy costs and that doesn’t help the AI sector.”

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A Bloomberg gauge of semiconductor stocks is down nearly 14% in March, while a measure of memory makers is down 25%, on track for its worst month since 2005. In contrast, indexes of utilities and retailers are down about 4% each.

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Investors have been rotating into more defensive stocks amid concerns over the impact of oil supply disruption from the Iran war. The AI trade has been especially vulnerable after the red-hot rally, given additional concerns over high spending levels and valuations.

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“Oil moving higher and ongoing rates volatility are driving a broader de-risking move out of growth and crowded trades like AI,” said Billy Leung, an investment strategist at Global X Management. 

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Memory stocks have been hit especially hard after massive rallies fueled by surging product prices and ravenous demand. Shares of Kioxia Holdings Corp. slid more than 5% in Tokyo on Tuesday, but are still up more than 80% on the year.

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Investors have also been rattled by news of a Google compression algorithm that some fear could reduce demand for memory chips, especially longer-term storage products made by Kioxia and Sandisk Corp. Others have pointed to disruption in the trade from SK Hynix’s planned US float.

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AI bulls remain confident that the hundreds of billions of dollars being spent on data centers by the likes of Meta Platforms Inc. and Alphabet Inc. will drive sales and profits higher for the world’s chip companies. Consumer demand is expected to further boost growth as AI becomes more mainstream.

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The selloff in Micron, which is down 22% this month, is “potentially overdone,” said Anna Wu, a cross-asset strategist at VanEck Associates Corp. “Once the market move on from the wartime panic and discover how cheap it’s gotten, I think it can bounce back quite hard.”

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