According to the latest market analysis from a leading ETF provider, investors are already looking towards a downturn in the semiconductor industry Global X ETF Australia.
Semiconductor stock valuations, like other growth areas, have fallen due to a slowing economy and fears of a recession. However, Global X’s head of investment strategy, Blair Hannon, predicts that semiconductors could make a comeback as they will power critical technologies in 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 consumer goods sales have all contributed to the industry’s decline, but Global X believe that many of these considerations have already been taken into account.
The SOX index, which includes the 30 largest U.S.-traded semiconductor stocks, is down about 44% this year, while the S&P 500 is down 25% over the same period.
Several market leaders, including Intel, Nvidia and Samsung, recently issued updates for the September quarter detailing a drop in demand and a rise in inventories, Hannon said.
“We can expect estimates to start to recover in 2023 after the next reporting season. This is in line with a range of market analyst expectations, which suggest a broader recovery is on the way as central bank rate hikes stabilize and consumer confidence returns.”
“Semiconductors also have high pricing power and higher margins due to their specialized nature, which, combined with their widespread use across a range of technologies, gives the industry notable headwinds.”
Hannon says chip makers are also preparing their businesses to deal with any deterioration in market conditions. Micron, for example, has cut capital spending for the 2022/23 financial year by 30%. In addition, a key feature of the semiconductor industry is its high capital intensity, which can further protect incumbents from disruptors arising from economic downturns.
Looking ahead to the end of the current market slump, analysts are looking for opportunities with high profit potential, meaning firms such as Morgan Stanley are rating established companies such as Taiwan Semiconductor as a “buy” to take advantage of the current discounts.
Geopolitical interference in the sector can also deter investors. The US is seeking to limit exports of semiconductors and advanced chip-making equipment to China, accelerating existing pressures.
“Investors are likely to benefit from blocking out the current noise and taking a longer-term approach to the chip industry. We’re seeing increasing investment in semiconductors around the world for space security,” Hannon said.
“The US, for example, is exploring domestic production, and even Australia is reportedly looking to invest around $1.5 billion in local supply as demand grows.”
Australia’s Global X ETF – formerly ETF Securities – provides net exposure to the industry through the Global X Semiconductor ETF, which tracks the Solactive Global Semiconductor 30 Index, which is comprised of 30 companies in developed markets as well as Korea and Taiwan. Despite this year’s drop, the index has returned an average of 21.9% over the past three years.
Other Global X ETF funds that offer exposure to the sector in more diversified portfolios are the Global X Morningstar Global Technology ETF and the Global X FANG+ ETF.