Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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The Chip War kicks into gear
Peter Garnry
Chief Investment Strategist
Summary: The semiconductor industry was negatively impacted last year by rising interest rates pushing down equity valuation and pricing pressures in certain segments such as memory chips. In the first week of trading the industry is off to a better start and Taiwan has just passed a law that will allow local semiconductor companies to get tax credits up to 25% of their R&D spending in an attempt to increase the industry's competitiveness against the US and European measures to set up their own supply chains. The Chip War is on and we expect more policy headwinds with tax incentives as the key driver which will end up being positive for shareholders.
Semiconductors are off to a good start
The recent book Chip War: The Fight for the World’s Most Critical Technology by Chris Miller is a great historical journey and perspective on the current semiconductor chip war between China and the US. The book is highly recommended and one can get a taste for the content in Chris Miller’s interview on the Top Traders Unplugged podcast. We have written extensively on semiconductors last year and highlighted that the US CHIPS Act is the biggest industrial policy since WWII paving the way for creating a domestic supply chain of semiconductors with tax credits provided to foreign chip companies if they stop engaging with Chinese firms on the most advanced chips. Europe is also building out its semiconductor supply chains. It is all about controlling the key ingredients in military equipment and all other important applications in a modern society from computers, smartphones, cars etc.
At the centre of this conflict sits Taiwan which is key nexus in the global supply chain of semiconductors and with China openly aiming to integrate Taiwan into China, the risks are too high for the US and Europe because China is becoming a strategic competitor that does not share the same values hence the US CHIPS Act. Taiwan is feeling the pressure and has just passed a new law that will allow local semiconductor companies to get tax credits for up to 25% of their R&D expenses in a bid to remain competitive and offset the subsidies in the US and Europe. It will boost earnings of Taiwanese semiconductor companies but also increase the competition further. Since an integrated domestic supply chain of semiconductors is existential for Europe and the US the two regions will continue to add incentives to accelerate the reconfiguration of this supply chain. If Taiwan provides incentives and subsidies, the US and Europe will just top it. There is no alternative. This has ramifications for the industry as it means a more attractive investment and tax setup which will be positive for shareholders longer term.
Semiconductors are off to a good start this year up 3.7% after being down 27% last year. Taking a closer look at our theme basket we can see that the best performing stocks have been Samsung Electronics, ASML, Intel, Micron Technology, and STMicroelectronics.
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