Artificial-intelligence-linked equities in Hong Kong cooled on Wednesday, trailing a weeks-long rally in global markets that has been propelled by the ongoing technology frenzy.

The volatility that analysts say reflects a degree of speculative fervor came as investor anxiety intensified over a potential bubble. But insiders believe that a catastrophic collapse is unlikely in the near term, given the AI sector’s sound underlying fundamentals.

The sharp rise in stock prices of international chipmakers and cloud giants, including Nvidia and Microsoft, bolstered investor sentiment and lifted major benchmarks across the globe. However, the upward trend has faltered, as uncertainty surrounding supply-chain constraints and a shift toward caution have begun to weigh on the AI sector.

In Hong Kong, chip foundry Semiconductor Manufacturing International Corp’s shares slumped more than 3 percent on Wednesday, while Baidu — which developed one of China’s top AI chatbot models, the ERNIE Bot — also dropped 1.57 percent.

Amid the volatility, many fear a possible bubble may be looming, but analysts say the AI sector remains a defining investment theme that is still far from a burst.

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“We’re not seeing signs of a bubble bursting,” said Eric Lin Pui-kwan, head of APAC research at investment bank UBS.

Lin said a crisis or a bubble burst usually happens when there are shifts in the sector’s fundamentals — such as demand declining or being replaced by other disruptive products — that the market fails to notice.

The bank remains positive on the AI sector’s outlook, he said, adding that he is bullish on upstream industries like semiconductors and hardware, as corporate capital expenditures in these areas show no signs of slowing.

Although the valuations of some newly listed equities in Hong Kong might face pressure as their lockup periods are going to expire, any price drops would be just a normal retracement, Lin said.

Martini Ma Tsang-kit, councilor of the Hong Kong Securities and Futures Professionals Association, also favors the AI sector’s upstream infrastructure — such as data centers and cloud services — that he said possess strong monetization capabilities.

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However, Ma cautioned that signs of valuation dispersion within the investment theme have increased. While leading players are supported by visible earnings and robust demand, the share prices of certain small-cap or concept-driven stocks appear to be driven more by market expectations than by actual returns, he said.

He added that the AI sector is sensitive to interest-rate dynamics and the broader economic growth as “weaker macro conditions may weigh on enterprise spending”.

In a recent report, China International Capital Corp said that while the sector has not yet reached a “typical bubble stage”, an objective gap exists between aggressive investment and actual market demand and capabilities.

The CICC said investors’ focus has shifted from mere capital-expenditure expansion to more about order certainty, profit realization, cash flow pressures, and return on investment.

The release of second-quarter earnings in mid-July is expected to be a critical turning point that potentially signals the next market trend, it added.

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Hong Kong’s benchmark Hang Seng Index on Wednesday climbed slightly 0.15 percent to 26,388.44 points, while the Hang Seng Tech Index increased 0.46 percent to end at 5,093.85.

New listings debuted on the day. Metis TechBio Co — a biotechnology company using AI to deliver and formulate drugs — surged as much as 126 percent.

Contact the writer at gabylin@chinadailyhk.com