Global Chip Stocks Plunge Amid Heightened Iran War Risks

Global Investors Unload Tech Stocks Amid Middle East Conflict

As the conflict in the Middle East enters its fifth week, global investors are increasingly opting to sell technology stocks, which have been among the market's biggest winners in recent months. This trend is evident in the performance of major players in the sector, with Micron Technology Inc. experiencing a significant decline of 9.9% on Monday, followed by a further slump in post-market trading.

In a similar vein, Samsung Electronics Co. and SK Hynix Inc. also posted significant losses, with Samsung slumping nearly 5% and SK Hynix dropping as much as 7.7% in early Korea Exchange trading on Tuesday. This sell-off is largely driven by uncertainty over potential peace talks to end the US and Israel's war against Iran, which has unsettled global markets and led to growing signs of capitulation.

According to Jim McCormick, chief global macro strategist at Citigroup Inc., the early narrative that tech would be immune to market volatility was misguided. The current market environment, characterized by sustained higher yields and energy costs, is particularly challenging for the artificial intelligence (AI) sector. As a result, tech shares, which had benefited from the AI boom in recent years, are now posting the steepest declines.

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Market Performance

The Bloomberg gauge of semiconductor stocks has declined by nearly 14% in March, with a measure of memory makers down 25% on track for its worst month since 2005. In contrast, indexes of utilities and retailers have declined by about 4% each. This disparity highlights the vulnerability of the AI trade, which has been particularly exposed to the current market conditions.

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 due to additional concerns over high spending levels and valuations. According to Billy Leung, an investment strategist at Global X Management, "Oil moving higher and ongoing rates volatility are driving a broader de-risking move out of growth and crowded trades like AI."

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Memory stocks have been hit particularly hard, with massive rallies fueled by surging product prices and ravenous demand. Shares of Kioxia Holdings Corp. slid more than 5% in Tokyo on Tuesday, although they remain up more than 80% on the year. The recent news of a Google compression algorithm that could reduce demand for memory chips has also contributed to the sell-off, particularly for longer-term storage products made by Kioxia and Sandisk Corp.

Despite the selloff, some investors remain confident that the hundreds of billions of dollars being spent on data centers by companies like Meta Platforms Inc. and Alphabet Inc. will drive sales and profits higher for the world's chip companies. Additionally, consumer demand is expected to further boost growth as AI becomes more mainstream. According to Anna Wu, a cross-asset strategist at VanEck Associates Corp., "The selloff in Micron, which is down 22% this month, is potentially overdone. Once the market moves on from the wartime panic and discovers how cheap it's gotten, I think it can bounce back quite hard."