Investors position for semiconductor industry recovery
Investors are already looking past the downturn in the semiconductor industry, according to the latest market analysis from leading ETF provider Global X ETFs Australia.
Semiconductor stocks – much like other growth areas of the market – have seen valuations fall as economic slowdown and recession fears loom. Yet, Global X’s Head of Investment Strategy, Blair Hannon predicts semiconductors could be set to make a comeback as they are going to power critical technologies well into the future.
“Semiconductors may be small in size, but they pack a punch when it comes to powering technology and potentially your portfolio. They have even been called the oil of the future,” Hannon said.
Semiconductor stocks are in their steepest decline since the Global Financial Crisis. Covid-related supply shortages, geopolitical tensions and softening sales of consumer products have all contributed to the industry decline, but Global X believes a lot of these considerations have already been priced in.
The SOX Index, which includes the 30 largest semiconductor stocks traded in the US, is down around 44% so far this year while the S&P 500 Index has fallen 25% over the same period.
Several market leaders, including Intel, Nvidia and Samsung recently released September quarter updates detailing falling demand and rising inventories, Hannon said.
“We can expect valuations to start rebounding into 2023 after the next reporting season. This aligns with a range of market analyst expectations which suggest a broader recovery is on the way as central bank rate hikes stabilise and consumer confidence returns.”
“Semiconductor also have robust pricing power and higher margins thanks to their specialised nature, which paired with their widespread use in a range of technologies gives the industry notable tailwinds.”
Hannon says chip makers are also preparing their businesses to manage any deterioration in market conditions. Micron for example, reduced its capital expenditure for the 2022/23 financial year by 30%. Additionally, a key feature of the semiconductor industry is its high capital intensity which may further protect the incumbents from disruptors coming out of the downturn.
Looking ahead to the end of the current market trough, analysts are seeking out opportunities with strong earnings potential meaning firms such as Morgan Stanley are rating established companies like Taiwan Semiconductor as ‘buys’ to take advantage of current discounts.
Geopolitical intervention in the sector may also be deterring investors. The US is aiming to restrict semiconductor and advanced chip manufacturing equipment exports to China which is expediting existing pressures.
“Investors will likely benefit from blocking out present noise and taking a longer-term approach towards the chip industry. We are seeing increasing investment in semiconductors around the globe to build security in the space,” Hannon said.
“The US for instance, is exploring domestic manufacturing and even Australia is allegedly looking to invest around $1.5 billion to safeguarding local supply as demand is set to rise.”
Global X ETFs Australia – formerly ETF Securities – provide pure play exposure to the industry through Global X Semiconductor ETF, which tracks the Solactive Global Semiconductor 30 Index, which is made up of 30 business in developed markets plus Korea and Taiwan. Despite this year’s fall, the Index has returned an annual average of 21.9% over the past three years.
Other Global X ETFs funds offering exposure to the sector within more diversified portfolios are the Global X Morningstar Global Technology ETF and the Global X FANG+ ETF.
