KUALA LUMPUR (Feb 7): Rising uncertainties in the Malaysian technology sector will keep volatility high and suppress investors’ risk appetite, Kenanga Investment Bank warned as it downgraded the sector to ‘neutral’.

The emergence of China’s DeepSeek with its lower-cost artificial intelligence (AI) models, escalating US-China trade tensions, and potential US policy reviews are risks hanging over the sector, the research house flagged in a note.

“While the ongoing semiconductor upcycle, now in its 13th month, is expected to continue, growth could slow as industry players reassess [their] business models,” Kenanga said.

The Bursa Malaysia Technology Index, which tracks 49 stocks in the sector, have declined nearly 8% since the start of 2025, amid concerns over tighter US restrictions on advanced chips and the launch of DeepSeek.

After a slight rebound, the decline was still more severe than the benchmark FBM KLCI’s 3.5% year-to-date drop, as foreign investors broadly dumped stocks related to AI and data centres.

Kenanga argued that the recent selldown in technology stocks was largely driven by investors moderating their expectations, rather than earnings weakness, pointing to minimal forward earnings revisions.

The house said it had also reassessed valuations of semiconductor stocks under its coverage, lowering the earnings multiples to reflect the sector’s “rising risk profile and evolving market dynamics”.

Kenanga also cut the average forward earnings multiples for the outsourced semiconductor assembly and test (OSAT) segment to 27 times from 29 times previously, lowering target prices for related stocks, including Inari Amertron Bhd (KL:INARI) and Unisem (M) Bhd (KL:UNISEM), by 4% to 19%.

Despite the caution, Kenanga highlighted Inari Amertron Bhd (KL:INARI), PIE Industrial Bhd (KL:PIE), and Kelington Group Bhd (KL:KGB) as its preferred picks, citing their strong earnings visibility and strategic positioning in the ongoing AI-driven growth trend.