The semiconductor shortage underlines how crucial advanced chips are in the global economy and highlights the good long-term prospects for the Korean and Taiwanese markets and companies like
Semiconductor manufacturing in Taiwan
(TSM). But in the short term, investors may want to take their chips on the table.
Semiconductors are important to manufacturing and consumer electronics, but their use extends to transportation and digital services, placing them at the center of conversations about national security, geopolitical tensions and strategic competition between countries. United States and China.
The United States is increasingly focusing on this technological battle, with defensive measures to restrict China’s access to advanced chip technology and offensive measures to reduce its dependence on China, including including incentives for chip companies like Taiwan Semi,
(5930.Korea) to invest more aggressively in the United States, as well as a China-focused legislative package making its way to Congress.
The centerpiece of this package will likely be the Endless Borders Act, which foresees that $ 100 billion will be invested over the next five years in research and development. Although it is still expected this summer, the timing has been delayed. Beacon Policy Advisors wrote in a client note this week that some 200 amendments have been proposed for the Endless Borders Act, slowing the markup of that bill in the Senate.
Meanwhile, China is investing orders of magnitude larger than the United States and has political and financial incentives to replace American technology with replacements in China and East Asia. But TS Lombard economist Rory Green said in a webinar this week that it would take China at least 10 years to catch up on advanced chip technology.
While Green is long-term bullish on Korea and Taiwan given chip dynamics, the surge in recent months epitomizes the “chip spike” with much of the good news already in the pricing markets and Taiwan and Korean chip stocks – one reason TS Lombard recommended taking profits and using declines over the next few months to bolster dominant companies.
iShares MSCI Taiwan
exchange-traded funds (EWT) are up almost 72% year-on-year and 16% year-to-date,
iShares MSCI South Korea
ETF (EWY) up 84% from the past, but struggling more recently, eroding the year’s gains to just 5%.
The recent momentum also led Andrew Foster, chief investment officer of emerging markets-focused Seafarer Capital Partners, to sell his stake earlier this year in Taiwan Semi, one of the oldest and largest positions in his funds. . The company is seen at the center of the race to dominate the technologies of tomorrow, and it is a stock widely held in global portfolios.
While Taiwan Semi continues to be “exceptionally well managed” with strong cash flow and a favorable dividend policy, Foster cited the company’s disproportionate growth in capital spending for its sale. Growth, he said in a note to clients, appears to be driven as much by political pressure as by “real and legitimate client demand.”
“We are concerned that increased capital spending will consume most of the company’s free cash flow, rendering it unable to pay its historic dividend, or possibly forcing it into debt, which it may has avoided in the past, ”he wrote.
As China struggles to build its foundry capacity, Foster also raised the risk that the sector suffers from a supply glut, even if demand continues to climb. And at valuations that have never been higher, Foster concluded that they were ignoring risks.
Others also see the reason for a broader pause for the Taiwanese and Korean stock markets. North Asian markets benefited from strong growth in electronics exports and surging demand for chips.
But if semiconductor shortages start to spill over into the Asian electronics value chain, these disruptions could threaten this strong export growth and the region’s chip-dependent export industries, according to a note by Gavekal analyst Vincent Tsui. He recommended clients reduce their exposure to emerging Asian stocks, including Korea, whose auto sector could feel the fallout from chip bottlenecks.
Korea and Taiwan will likely remain in the spotlight as the struggle for dominance of technology continues between the United States and China. Korea may be able to maintain the dichotomy of relying on the United States for security and China for economic growth. It could potentially split its supply chain and create China-focused entities to increase its sales to China, perhaps at the expense of Taiwan, which could trade some of its economic prosperity by selling to China for security. military offered by the United States, Green mentioned.
Political observers are downplaying the risk of a planned military conflict, especially because any incursion would damage the country’s chipmaking factories and result in an evacuation of engineers necessary for its operation, as well as sanctions that would cut China off from inputs including she needs. build the chips.
But the risk of an incident still looms. “The risk increases with Taiwan leveraging its geoeconomic clout to gain concessions from governments in developed markets and move closer to the United States,” Green said, noting that there was little China could do about it. subject. “Usually he would use economic sanctions, but they need [Taiwan’s] chips so that they stepped up naval and air incursions to 200% compared to the pre-Covid period. ”
And that puts pressure on Taiwan, with several planes crashing and 20% of Taiwan’s military budget spent on jamming planes to deal with threats, Green says.
Write to [email protected]