Semiconductor stocks and exchange traded funds were among 2021’s best-performing technology assets, but some of the air is coming out of that trade as growth stocks languish in early 2022.
However, there’s hope for ETFs such as the VanEck Vectors Semiconductor ETF (SMH) because some experts see the global chip supply shortage that’s confounded the industry and customers since the start of the coronavirus pandemic potentially easing in the second half of this year.
With regards to SMH and comparable assets, something investors need to keep in mind is that even if a recovery in supplies legitimately materializes in the back half of this year, it’s unlikely to affect each of SMH’s 25 components the same way.
“Global semiconductor supply shortages could begin to ease in 2H22, despite pockets of near record low inventories throughout the supply chain, due to increased capacity and the potential for demand to moderate from currently high level,” notes Fitch Ratings. “However, pandemic-driven government intervention, particularly in countries that maintain a zero-covid policy, will exacerbate supply volatility and could push out supply chain normalization.”
SMH allocates 11.07% of its weight to Taiwan Semiconductor (NYSE:TSMC). That’s relevant because that company operates one of the world’s largest chip foundries. That should be a positive trait as more supply comes to market, but the coronavirus could play a role in that scenario.
“Currently, production at foundries in China, Hong Kong and Taiwan are at risk of government-mandated lockdowns in some cities due to zero-covid policies. Many of the world’s largest chipmakers, including leading edge foundries, Taiwan Semiconductor (TSMC) and Samsung Electronics (AA-/Stable), produce a significant amount of chips in these countries,” adds Fitch.
Some SMH components are planning additional spending this year that could bring more supply to market. For example, Taiwan Semiconductor is building a new fabrication facility in Arizona, while Intel (NASDAQ:INTC) is forecasting 2022 capital spending of $25 billion to $28 billion, up from $18 billion in 2021. Intel is SMH’s fifth-largest holding at 5.29%.
Even if more chip supply comes to market, that might not dent share prices in the group because demand remains sturdy.
“The robust demand, as economies recovered from intervention-induced downturns, may not be sustainable,” notes Fitch. “However, the risk of excess industry supply, should end-market demand slow as capacity aggressively increases, is low in the near term, given ongoing semiconductor component shortages and record low inventories. Concerns are heightened over the intermediate term but should be mitigated by better demand visibility, given stronger partnerships with customers that changed buying patterns due to the protracted shortage of chips, and the secular growth drivers of semiconductor demand.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.
