Cut to the Chase! AI sentiment vs. fundamentals

Speaker A: Welcome to Standard Chartered Money Insights, a podcast series by Standard Chartered bank that brings you market views and insights on the go.

Speaker B: Hello, welcome to today's edition of Cut to the Chase. Today is Wednesday 29th July and my name is Fu Kian. With Korean and Taiwanese equity markets falling sharply yesterday, the sentiment on AI or artificial intelligence is hitting the brakes, uh, amid a wave of negative AI related headlines. However, we believe it is important to separate the noise from the fundamentals which we believe continues to be supportive of the AI trade. While we acknowledge that sentiment towards AI has worsened following the release of Kimik 3 which is a high performing and low cost AI model from China, we believe the concerns surrounding Kimi K3 are uh, being overstated. Early impressions focus on its apparently low cost pricing, but online reviews following the release of the full model suggest that actual costs are significantly higher when assessed on a task completion basis rather than just the cost of tokens. More broadly, there have also been concerns about China's capability in making lithography machines which are used to manufacture semiconductor chips. While China continues to make progress in making semiconductor equipment from uh, the news articles that we see so far, the machines in China continue to be the older generation compared to the global leaders and not the most advanced tools. More importantly, the news suggests that China is still making only a small number of these machines and about 5 this year and 20 next year compared to around 4 to 500 of these older generation machines which are being shipped globally today. In short, the impact of China's semiconductor equipment is still uh, limited in the next two years. We also believe in this semiconductor race between the US and China, the market opportunity remains sufficiently large for multiple players to benefit and coexist, allowing this race to continue with industry expansion and innovation rather than creating a winner takes all outcome. Meanwhile, AI investment plans continue to be revised up uh, a fact that we have seen so far from the big tech companies that have reported Q2 earnings so far. Another concern has been in the credit markets where credit spreads for big tech hyperscalers have widened. Recently, however, we see the balance sheets of these big tech hyperscalers remaining rock solid and well within their financial capacity to make these AI investments. In summary, we believe the market is overreacting to headlines without fully assessing their implications. Much of the debate remains driven by perception and sentiment. While the underlying fundamental drivers of AI adoption, spending and earnings power remain largely intact. The next key test will uh be earnings report from semiconductor chipmakers and the big tech hyperscalers this week. We believe the earnings reports should provide investors with more concrete evidence on AI demand monetization trends and capital spending plans. Uh, these results are likely to play a far greater role in shaping the investment narrative than the recent headlines that have dominated market attention. For now, we would caution investors against overreacting to short term news flow. In periods of heightened uncertainty, distinguishing between headlines and fundamentals becomes even more important. Our recommendation is to stay focused on underlying earnings, cash flows and business trends rather than allowing, uh, sentiment driven headlines to dictate major changes to your portfolio. Thanks for listening and I look forward to chatting again with you soon.

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