Global financial services firm Morgan Stanley said the risk of a renewed trade war could send technology stocks in Asia plunging.

In an analysis note, they estimated the sector has the potential to decline by around 20%, if tariffs on computer chips increase and trade tensions between the US and China worsen again.

Analyst Shawn Kim and team note that consensus earnings estimates are currently overly optimistic. They recommend reducing exposure to the tech sector in the near term and hedging against the risks involved.

While global enthusiasm for Artificial Intelligence (AI) has driven Asian tech stocks higher, it has also led to soaring valuations. Morgan Stanley notes that while semiconductor stocks in the region have risen more than 65% since the end of 2022, improvements in earnings per share estimates have yet to be seen.

In this situation, Morgan Stanley sees some opportunities in the equity market. They recommend focusing more on domestic Chinese internet and semiconductor stocks, which are expected to benefit from trade tensions thanks to higher domestic sales exposure.

At the same time, US President Donald Trump has communicated with Mexican President Claudia Sheinbaum regarding the postponement of trade tariffs between the two countries. Not only that, he also stated that Mexico will deploy 10,000 troops to the US border to stop illegal trade.