AI stock opportunities lie in ‘battleground’ sectors, not ‘titans’, BofA Securities says

Global investors should shift their focus from Asia’s dominant AI hardware “titans” to a growing group of mid-cap “battleground” sectors that offer stronger growth potential amid intensifying competition, according to BofA Securities.\nIn a report, analysts from the Bank of America investment banking arm mapped more than 330 Asian stocks across 22 subsectors in the artificial intelligence technology layer – representing market capitalisation of nearly US$6 trillion. The most compelling opportunities in the region were in a growing group of under-covered “battleground” sectors that had more mid-cap stocks and relatively high profitability, BofA said.\nSemiconductor fabrication and memory chips were the two largest sectors by market cap and formed “the core holdings”, said analysts led by Winnie Wu, head of Asia-Pacific equity strategy and co-head of China equity research at BofA Global Research, in the report published on December 4. “But we advise investors to seek alpha in the ‘battleground sectors’ with more mid-cap stocks.”\nThe bank defined these battleground sectors as those with many mid and small-cap stocks, where rising stars, under-covered companies and pair-trading opportunities were more abundant.\nThe top five battleground sectors with relatively high profitability were semiconductor equipment, printed circuit board/copper clad laminate (PCB/CCL), optical module/co-packed optics (CPO), microprocessor unit/system on chip and outsourced semiconductor assembly and testing, according to the bank.\nSemiconductor equipment alone included more than 50 stocks in Asia with a combined market cap close to US$500 billion, benefiting from aggressive capital expenditure by advanced chip fabs, according to the report.\nThe bank said CPO was one of the most profitable areas, with expected return on equity near 40 per cent in 2025-2026, driven by the strong AI demand for higher bandwidth, lower power consumption and reduced latency in optical interconnects.\nAnother bright spot was PCB/CCL makers, which were riding “explosive demand” from AI servers. Taiwan remained the global leader in high-end server and packaging substrates, while mainland Chinese manufacturers were rapidly catching up in capacity and technology, the bank added.\n\n“The Asia-Pacific region has emerged as an indispensable engine powering global AI development, with a sum of highly specialised national systems,” the analysts said in the report.\nDespite a recent pullback, Chinese AI stocks continued to trade at a premium to global peers, according to the investment bank.\nChinese AI names surged between August and October, with the trailing price-earnings multiple of the CSI AI Index jumping to nearly 80 times in late September from 55 times in June, before falling back to 60 times currently. By contrast, the valuation of the global AI & Big Data Index eased to 38 times currently from 40 times in early November.\nAcross the region, the bank said, Asia’s AI supply chain would deliver 20 per cent compound annual revenue growth between 2025 and 2027, outpacing many global tech categories, with mainland Chinese companies leading in revenue growth and Taiwanese players continuing to excel in regional return-on-equity rankings.\n