Morgan Stanley has turned more cautious on the semiconductor sector but its analysts still expect a number of chip stocks to do well this year. After a stellar run last year, many analysts are predicting another year of growth for the semiconductor sector. But in a note on Jan. 3, Morgan Stanley analysts said they thinks a chip oversupply is possible in 2022. They give a number of reasons for this including fading demand for "stay-at home" consumer electronics and the recovery in automotive fabrication capacity in Malaysia. Chip makers are also continuing to expand their wafer foundry capacities, while chip inventory has been "gradually replenished" in the third quarter of 2021, the bank added. "A semi[conductor] inventory correction may come in 1H22 given the chip oversupply," the analysts, led by Charlie Chan, said, as they forecast global semiconductor growth to slow to 7.7% in 2022. The sector posted growth of 23.8% in 2021 compared to a year ago, Chan added. Chip makers are also increasingly facing cost and margin pressures. Even as some foundries such as Taiwan Semiconductor Manufacturing Company and Samsung have announced price hikes, Morgan Stanley believes foundry vendors will still have to absorb some costs. However, bright spots remain. Chan noted that the sector is benefiting from secular trends such as the growth of 5G, electric vehicles, artificial intelligence, and the rising popularity of the metaverse . China's localization ambitions — building its own semi equipment supply chain to reduce its reliance on chip imports — should also bode well for the sector, Chan added. The "top stock ideas" from Morgan Stanley's analysts include the following: U.S. ACM Research Taiwan MediaTek United Microelectronics Alchip Nuvoton ASmedia Technology RichWave Technology China Hangzhou Silan Microelectronics . All stocks are rated overweight by the bank.
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Morgan Stanley has turned more cautious on the semiconductor sector but its analysts still expect a number of chip stocks to do well this year.