AI stock rout: Should Singapore investors buy the dip or cut exposure?

On November 5, a sharp decline in US technology stocks reverberated across Asia, including Singapore, leaving investors uncertain whether to purchase the dip, reduce exposure, or wait and observe the outcome. The Nasdaq 100 plummeted by 6.4% following the US midterm elections, resulting in a loss of approximately US$2.5 trillion in market value.

The S&P 500 also experienced a decline of 4.4%, while the Philadelphia Semiconductor Index fell by 12.2%. The market impact extended to South Korea, Taiwan, and Japan on November 6, as well as to Singapore-listed technology stocks. The recent Democratic victory in Congress raised concerns about heightened scrutiny of artificial intelligence (AI), coinciding with apprehensions about the speed at which investments in chips and data centers could generate profits.

Experts suggested that the surge in AI investments and speculative trading may have intensified the stock market decline, as funds and investors rushed to exit the sector. Investors must monitor whether the Democratic Congress's increased focus on electricity, water usage, grid costs, and permits could result in rules that delay data center construction.

The next key indicators will be whether prominent cloud providers adjust their spending plans and whether chip manufacturers revise their earnings forecasts. While data center construction may be impacted, long-term demand for AI and computing power remains robust, according to Saxo chief investment strategist Charu Chanana. Many leading technology companies retain substantial cash flows, established clientele, and significant competitive advantages.

The market sell-off appears to stem from genuine uncertainty and heightened selling pressure rather than an abrupt collapse in business fundamentals, Chanana noted. Brian Levitt, chief global market strategist at Invesco, views the downturn as a "reset" for one of the strongest and most concentrated trades in the market. He anticipates that the correction might persist, potentially causing stocks that led the market in recent years to underperform in the coming months.

Conversely, the reduced prices may make certain AI stocks more appealing to long-term investors. For long-term investors who can withstand further losses, Chanana advises a consistent investment approach if the portfolio mix still aligns with their preferences. Investors with additional cash or those considering buying the dip should prioritize companies with robust balance sheets, consistent cash flow, and reasonable valuations.

One recommendation is to diversify purchases over time to mitigate the risk of committing all funds at an unfavorable price. Those heavily invested in AI should consider reallocating some funds to established businesses with proven cash generation capabilities or diversifying into other sectors with distinct demand sources. Those utilizing leveraged investments should assess potential price drops before allocating additional capital or selling their holdings.

Retirees or individuals with upcoming significant expenses should ensure they possess sufficient cash reserves to avoid selling shares during market downturns. While investors should not rule out the possibility of additional price declines, they should acknowledge that a substantial drop in share prices does not necessarily indicate that the underlying investment opportunity has diminished by the same extent.

Chanana emphasizes that market sentiment can shift more rapidly than business fundamentals, particularly when leverage and widespread positioning amplify the impact, leading to extreme price fluctuations. Investors focused on company fundamentals, such as profitability and return on investment, are likely to be more optimistic. According to OCBC executive director of wealth advisory Afdhal Rahman, cloud giants like Microsoft, Alphabet, and Amazon appear relatively well-positioned in the short term.

These companies may benefit from reduced spending pressure if tighter regulations delay data center projects, allowing them to retain more cash. Their diverse business portfolios, financing access, and strong balance sheets provide resilience against potential delays. However, cloud giants could face fewer orders for chipmakers, storage suppliers, and equipment manufacturers if permit delays lead to lower capital expenditures.

Rahman favors graphics processors, custom chips, and networking equipment, while being more cautious about memory stocks, as prices may have already incorporated much of the anticipated growth. In software, established companies with central products, proprietary data, and close ties to prominent AI laboratories are better positioned to maintain their business amid potential regulatory adjustments.

Rahman also highlights the potential benefits for cybersecurity firms, as increased AI adoption introduces new security challenges. Rahman cautions against smaller AI cloud providers reliant on substantial debt, as permit delays could prolong interest payments before generating revenue. Rahman advises that while funding is not entirely exhausted, investors should exercise caution and allocate AI exposure across multiple industry sectors.