Although tensions between the US and China over Taiwan are increasing short-term uncertainty for investors in semiconductor ETFs, there is reason to believe bigger concerns about the economic outlook are already priced in.
It was only a few months ago that semiconductor ETFs were riding high on a wave of post-pandemic demand and a chip supply shortage.
That changed as investors began worrying that the Federal Reserve’s war on inflation – sparked in part by the chip shortage that delayed shipments of automobiles and computers – might cause a recession and dent demand for semiconductors.
As a result, the three biggest semiconductor ETFs in Europe – the VanEck Semiconductor UCITS ETF (SMH), the Lyxor MSCI Semiconductors ESG Filtered UCITS ETF (SEMG) and the iShares MSCI Global Semiconductors UCITS ETF (SEME) – are all down over 15% this year, as at 9 August.
In recent weeks, these ETFs began recouping losses and seem to generally have shrugged at this week’s rising worries over Taiwan, where most of the world’s chips are made. It is also home to the biggest fabricator, Taiwan Semiconductor Manufacturing, which is the top holding in VanEck’s offering.
Recession gigger worry than Taiwan
The semiconductor ETFs haven’t been moving much on the Taiwan noise because investors don’t think a Chinese invasion of Taiwan is probable, Sanjay Devgan, an ETF portfolio manager at Columbia Threadneedle Investments, told ETF Stream’s sister publication ETF.com.
“It sounds like it is a lot of sabre rattling,” he said.
Given the lack of meaningful reaction, it seems the deeper issue worrying semiconductor investors is what a US recession would mean for chipmakers and their suppliers, and much of this may already be priced in.
“The most recent downturn was the most pronounced and lengthiest since the financial crisis, so we do think equity markets have baked in a good portion of the risks for 2023,” Angelo Zino, senior equity analyst at CFRA Research, told ETF.com.
“We believe that price leads fundamentals, and the chip industry is among the most forward-looking in nature,” he continued. “Often chip stocks are ready to move up as estimates get cut, as they have already been discounted in the shares.”
He added he expects a mild correction in the semiconductor industry because of slowing demand for PC’s and low-end smartphones and increasing capacity.
That downturn will likely bottom in the first half of next year, he said, and his longer-term outlook is bright, as demand over the next decade increases along with growth in the data centre, automotive and industrial end-markets.
Share price rebound underway
Meanwhile, many semiconductor companies have beaten revenue and earnings expectations recently, underpinning a rebound the PHLX Semiconductor Sector index has seen in recent weeks, Devgan said.
“My gut tells me the worst is behind us,” he said, noting that eventually, demand for semiconductors will return to the growth trend that the pandemic accelerated as more people work and entertain themselves remotely via the internet.
“Investor fear of the consequences of a recession and rate hikes should already be built into the price of semiconductor ETFs, and long term, there is a clear trend toward accelerated computing, regardless of the near-term macroeconomic effects,” Richard Gardner, CEO of financial services firm Modulus Global, said.
This story was originally published on ETF.com
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