Morgan Stanley advises investors to consider capitalizing on profits in Asian technology stocks due to trade-related uncertainties, high valuations, and limited earnings growth potential.

Analysts, led by Shawn Kim, warned in a recent note that the sector faces about a 20% downside risk if tariffs on computer chips are increased and trade tensions re-emerge. They also pointed out that the current earnings forecasts are overly optimistic.

The recommendation is to reduce exposure to the broader technology sector and hedge on sector exposures since the prevailing challenges create an unfavorable near-term risk-reward scenario.

The investment bank noted that the global enthusiasm for artificial intelligence has significantly boosted Asian tech stocks, particularly semiconductor shares, which have surged over 65% since the end of 2022. However, this rapid growth has led to stretched valuations without corresponding improvements in earnings-per-share estimates.

Adding to the concerns, President Donald Trump has indicated plans to impose further tariffs on foreign-produced computer chips and semiconductors. The analysts recalled how geopolitical tensions in 2018 negatively impacted shares in this sector.

Despite these challenges, certain areas of the equity market still show promise. Morgan Stanley favors Internet stocks and Chinese domestic semiconductor companies over those with global exposure.

They highlighted potential opportunities in firms like Naura Technology Group Co., Semiconductor Manufacturing International Corp., and Hua Hong Semiconductor Ltd., which might benefit from heightened trade tensions thanks to their significant domestic market presence.