AI boom in question, again

ASIA is among the regions most vulnerable to an artificial intelligence (AI) correction, given its outsized role in supplying the chips, electronics and equipment underpinning the AI boom.

This could leave its economies particularly exposed if AI spending slows sharply.

Asean+3 Macroeconomic Research Office (Amro) opines that a slowdown in AI demand could hit the region through weaker technology exports, lower capital spending, capital outflows and tighter financing conditions.

AI-enabling goods accounted for about two-thirds of the increase in Asean+3 exports in the first half of 2026, underscoring just how dependent the region’s recent export strength has become on the AI investment cycle.

Amro estimates that even a moderation in global AI investment to its 2024 growth rate could drag regional growth to 2.6% in 2027, from its baseline forecast of 4.1%.

The International Monetary Fund managing director Kristalina Georgieva has raised concern over the rising economic and financial concentration around AI which is putting pressure on AI companies to deliver productivity and earnings gains to justify lofty valuations.

She has also warned that market disappointment could turn into “a far-reaching shock”. Malaysia’s semiconductor industry, particularly outsourced semiconductor assembly and test players and equipment makers, has been seeing huge gains from the global AI-led investment cycle.

Meanwhile, Singapore’s Temasek says the unwinding of the AI trade is not imminent, but there may be bumps in 2027.

Any reversal, Temasek opines, could be triggered by safety concerns that lead to tighter regulation or signs that customers are failing to generate sufficient returns from their spending.

Nonetheless, the Singapore state-owned investment giant remains bullish on AI over the longer term and has continued to increase its investments into the sector. The rally has also pushed valuations higher. ViTrox Corp Bhd, for instance, has seen its share price surge about 177% year-to-date, giving it a trailing price-to-earnings (PE) ratio of about 98.25 times and a forward PE of about 69.51 times.

Other highly valued names include THMY Holdings Bhd, trading at a trailing PE of 108.51 times and a forward PE of 126.32 times, while UWC Bhd and Inari Amertron Bhd are trading at trailing PEs of 93.07 times and 81.55 times, respectively.

These valuations leave little room for a misstep.

AI demand doesn’t have to collapse for highly valued counters to come under pressure; even a moderation in the pace of AI investment could trigger a sharp repricing if spending and earnings growth fall short of expectations.

That said, there are hardly any signs that the AI boom is slowing down. Hyperscalers continue to pour billions into data centres and computing capacity, while demand for advanced chips, memory and semiconductor equipment remains strong.

The longer-term adoption of AI is also still in its early stages, suggesting the investment cycle could continue to run hotter for longer. If that happens, Malaysia’s semiconductor players could continue to benefit, with strong earnings growth potentially catching up with some of the lofty valuations.

The bigger concern is that the correction would not stop at share prices. A pullback in AI investment could weaken semiconductor orders, reduce capital spending and exports, and trigger capital outflows and tighter financing conditions – turning an AI-driven market correction into a broader economic shock.