(Bloomberg) — Asian technology stocks were on track for their worst selloff since the early days of the pandemic after Morgan Stanley strategists recommended investors book profits from the artificial intelligence boom.

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The renewed slump followed concerns that set in last week over the sustainability of the red-hot AI trade as well as a possible tightening of US restrictions on sales of tech to China. The Bloomberg Asia Pacific Semiconductors Index fell as much as 3% Monday, poised for its worst four-day loss since March 2020.

Morgan Stanley favors a pivot toward consumer staples before the first Federal Reserve interest rate cut, which it expects in September. It lowered its view on Asian and emerging-markets tech stocks to equal-weight while cutting key AI chip-sector stocks including Taiwan Semiconductor Manufacturing Co. from its focus lists.

“It is now time to move to the sidelines,” with tech shares looking overbought and expensive, strategists led by Jonathan Garner wrote in a report. “We note that change in Asia market leadership historically occurs ahead of first Fed cut.”

The tech downgrade is the brokerage’s first since it raised the sector to overweight in October 2022. Consumer staples in contrast have “less demanding” expectations through 2026 and “classic defensive characteristics in a global growth slowdown,” the strategists said, raising their view on that group to overweight for the first time in at least five years.

The global AI stock boom led by Nvidia Corp. wobbled last week as investors reassessed the potential for further gains amid looming central bank policy shifts and the US presidential election. That’s helped drive a rotation into market laggards including consumer stocks and small caps.

Besides TSMC, other stocks removed from Morgan Stanley’s key recommendations include South Korean memory maker SK Hynix Inc. and chip-equipment maker Tokyo Electron Ltd. Each of the three fell more than 2% Monday.

Not that it’s completely throwing in the towel on tech. While chip stocks look particularly overheated, the “impending AI smartphone cycle” is a key point to watch, the strategists said, keeping Samsung Electronics Co. and iPhone assembler Hon Hai Precision Industry Co. in their focus lists.

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“We are not calling for the ‘end of the cycle’ – but with all the focus on shortages and talk of a new AI paradigm, it is important not to lose sight of the normal, cyclical nature of the semiconductor market,” analysts including Shawn Kim and Charlie Chan wrote in a separate report.

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