KUALA LUMPUR (Oct 13): The recent escalation in the US-China tech war has created a wave of uncertainty but, for discerning investors, this volatility may present a strategic opportunity to accumulate quality stocks on weakness.

Public Invest Research' top picks in the current environment are Cloudpoint Technology (KL:CLOUDPT) and Mi Technovation (KL:MI).

This window of opportunity opens as China unexpectedly expanded its control over rare earth exports, adding five new elements and imposing extra scrutiny for chip buyers. In a swift retaliatory move, the US announced new tariffs of 100% on key imports from China, alongside export controls on advanced chip design software.

"In our view, we believe both nations are now using export controls as bargaining chips ahead of their scheduled meeting in South Korea next month. Nevertheless, we expect to see a knee-jerk reaction in technology stocks [on Oct 13], as investors are likely to take profit in view of the rising tension in the chip war amid the current rich valuations."

The latest move from Beijing targets its most powerful lever in the tech sector: rare earths.

China commands over 90% of the global market for processed rare earths and the powerful magnets made from them. The five newly restricted elements — holmium, erbium, thulium, europium and ytterbium — have critical applications in nuclear, defence, medical, and fibre-optic sectors.

For the semiconductor industry, this control poses a direct threat. Chipmakers who use rare-earth-based chemicals in the fabrication process and the toolmakers who integrate rare-earth magnets into their equipment will face immediate pressure.

Industry giants like ASML and Applied Materials, whose machines rely on extremely precise lasers and magnets containing these elements, are highly dependent, said PB Invest Research. 

"The clearest risk the industry is facing now is a surge in the prices of rare earth-dependent magnets that are vital to the chip supply chain, which would translate into higher cost of production for advanced chips."

Initial reactions from Taiwan, home to the world's largest contract chipmaker TSMC, have been muted as China's new rules differ from Taiwan'ssemiconductorr processes, said PBInvest Research.

"Taiwan’s sources of rare earths are mainly from Europe, the US and Japan. Nevertheless, our channel checks revealed that TSMC relied on China’s materials for 30% of its production capacity for chips at 7nm and below."

At the time of writing, MI shed 4 sen or 1.4% to RM2.83 while CloudPT slid 1.5 sen or 1.7% to 86.5 sen.