Rising Financing Costs Challenge Asia's AI Supply Chain Stocks

Investors are growing increasingly wary of the sustainability of artificial intelligence (AI) capital spending in Asia, as rising financing costs threaten to undermine the sector's rapid expansion. A recent sell-off in US technology stocks, exacerbated by inflation concerns, has sent ripples through Asia's semiconductor and hardware supply chains, which have been major beneficiaries of the AI boom.

The pressure intensified recently as oil surged to US$110 a barrel for the first time since May, stoking inflation fears and prompting a deeper examination of the trillions of dollars being borrowed to build AI infrastructure. This scrutiny intensified as the Philadelphia Semiconductor Index fell 4.3%, marking its longest losing streak in 17 months, with a total decline of 12% over six sessions, according to Business Times.

“Jian Shi Cortesi said that financing costs are like gravity for the AI boom.”Jian Shi Cortesi, Fund Manager, GAM Investment Management

In Asia, stocks of semiconductor firms have been particularly hard hit. For example, shares of AEM Holdings dropped by 9.9% to S$8.80, while UMS Integration fell 10% to S$2.33 on October 15. Other companies like CSE Global and Frencken also experienced significant losses, with declines of 9.8% and 6.4%, respectively. Analysts attribute these declines to a recalibration of expectations rather than a fundamental breakdown in the AI investment narrative, as noted by Ulrike Hoffmann-Burchardi, global head of equities at UBS Global Wealth Management.

The ongoing sell-off highlights a crucial concern: whether hyperscalers and neocloud operators can maintain their financing for the infrastructure necessary to deploy AI technologies. Jian Shi Cortesi, a fund manager at GAM Investment Management, emphasized that rising borrowing costs could hinder infrastructure projects and delay spending, potentially leading to a reset in earnings expectations for Asian suppliers.

“Vey-Sern Ling said that if hyperscalers and neoclouds cannot fund their data centre investments, that would translate into lower orders for Asia enablers like TSMC, Samsung, and SK Hynix.”Vey-Sern Ling, Managing Director, Union Bancaire Privee

Goldman Sachs has warned that over $3.5 trillion of AI infrastructure spending could be at risk of impairment by 2030 if investment continues to outpace the revenue needed to justify it. Vey-Sern Ling, managing director at Union Bancaire Privee, said that if hyperscalers and neoclouds cannot fund their data centre investments, that would translate into lower orders for Asia enablers like TSMC, Samsung, and SK Hynix.

Despite these challenges, some investors remain optimistic about the long-term demand for AI technologies. Kunjal Gala, head of global emerging markets at Federated Hermes, expressed confidence that they are not worried about the ongoing chip sell-off, as demand for AI remains strong.

“Kunjal Gala expressed confidence that they are not worried about the ongoing chip sell-off, as demand for AI remains strong.”Kunjal Gala, Head of Global Emerging Markets, Federated Hermes

The implications of this sell-off are particularly significant for Asian equities, where the AI buildout has become a dominant investment theme. Major players like TSMC, Samsung, and SK Hynix account for nearly a third of the MSCI Asia ex-Japan Index, underscoring their critical role in the region's economic landscape.

As the market continues to react to these developments, the focus will likely remain on how financing conditions evolve and whether they can sustain the momentum in AI investments.