Investors Rotate From Tech Into Defensive Stocks as HSBC Calls the AI Selloff Overdone

The MSCI World Information Technology index lost 7 per cent in October and has fallen a further 4.6 per cent so far in November. MSCI's US-only technology index is down 11.5 per cent since October. Investors have worried this year about AI capital expenditure, cash flow, debt and circular financing between chipmakers, cloud providers and AI labs. The Democrats' sweep of Congress in last week's midterm elections added to the pressure.

The Nasdaq Composite was up about 8.7 per cent for the year at the close on November 9, after shedding 5.3 per cent in October. It has recovered in recent days but remains 0.7 per cent lower for the month after dipping into correction territory last week. South Korea's Kospi, which is heavily exposed to semiconductors, lost 16.2 per cent in October and is down more than 8 per cent this month.

An analysis by AJ Bell of 11 super-sectors in the S&P Global 1200 found that healthcare and consumer staples have been the best performers in the second half after energy, which has gained from higher oil prices since the US-Iran war. Information technology rose 28.4 per cent in the first half to lead all sectors, and has since fallen more than 11 per cent to rank last.

"Information Technology has gone from penthouse to outhouse," Russ Mould, AJ Bell's investment director, said in a note on Monday. He described equity markets as "in a state of alert" and said the rotation could reflect worries about next year's economic outlook "as well as worries over whether air is leaking out of an AI 'bubble.'"

HSBC sees an opportunity in the selloff. Alastair Pinder, the bank's head of emerging markets and global equity strategy, called recent moves "vicious, and in our view, overdone," and said markets were already pricing greater execution risk and capex delays. He said US semiconductors trade at 13.5 times forward 12-month earnings after a 45 per cent de-rating since June.

"The rotation into defensives looks extreme," Pinder said. "Walmart trades on 40x forward earnings, near a record high, while Nvidia trades on 13x, near a record low."

The next test for the sector is Nvidia's quarterly results, due next week.