Quarterly Outlook
Equity outlook: The high cost of global fragmentation for US portfolios
Charu Chanana
Chief Investment Strategist
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Confidence in semiconductor stocks is plummeting on realignment
Peter Garnry
Chief Investment Strategist
Summary: Semiconductor stocks have had a tough year with our semiconductor theme basket down 39% this year as everything from memory chips to graphics cards are experiencing plummeting pricing. The ongoing cost-of-living crisis is also having a negative impact on consumer electronics demand hurting growth in the industry. But the most important drivers are the US CHIPS Act aiming to reshore a significant part of the semiconductor supply chain back to the US and the US restrictions on exports to China which will significantly impact short-term growth for many semiconductor companies.
Reshoring of semiconductors is causing headwinds
Semiconductor stocks have been under pressure the entire year with our semiconductors basket down 39% as pricing has come down on memory chips and graphics cards. In addition, the US has enacted its US CHIPS Act which is the country’s biggest industrial policy since WWII which aims to reshore a significant part of the semiconductor supply chain back to the US. Furthermore, the US is constraining exports of semiconductors and equipment to Chinese companies with the latest restrictions announced could hit 5-8% of TSMC’s revenue (the stock is down 3.5% in pre-market trading).
The entire industry group is currently valued at 10.3x on 12-month forward EV/EBITDA which is still a premium relative to the average of 9.3x since May 2005. We still see great potential and growth in the semiconductor industry but as financial conditions continue to get tightened and the industry being a cyclical industry we expect valuation compression to continue. Investors should think semiconductors into their long-term portfolio and great risk-reward opportunities will arise as valuations will likely plunge below the long-term average as the overall equity market is also likely to extend lower as economic growth slows down even more due to tighter financial conditions.
The list below highlights the 10 largest semiconductor and semiconductor equipment stocks:
- TSMC
- Nvidia
- Broadcom
- ASML
- Texas Instrument
- Qualcomm
- Intel
- AMD
- Analog Devices
- Applied Material
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