Driven by successful vaccination programs and a feeling that we are starting a new positive global economic cycle, stock markets around the world, especially in the US, UK and China, has bounced back strongly.
Now, investors face a challenge: how to reconfigure their portfolios in the context of this cyclical recovery economy.
The problem is that classic cyclical stocks – industrial stocks, hotels, airlines, mining, energy and even cruise ships – have risen sharply this year, with many stocks hitting historic levels. green.
While we are witnessing a nascent economic recovery, backed by promises of currency assistanceOne big question is how sustainable economic growth will be when the fiscal tools are eliminated.
It is difficult, even for the disciplined investor, to gauge exactly how this concern plays out in financial markets and to cyclical stock sales at good times.
It would certainly be wiser to invest in long-term sustainable structural growth stocks that are less susceptible to economic cycles.
Likewise, mining and consumer goods stocks are easily classified as cyclical. But what about stocks somewhere – stocks that were considered cyclical in the past but have suddenly seen a spike in structure? Take for example, the key industry’s manufacture of semiconductors.
Historically, very cyclical, the sector has changed dramatically over the 2019-20 period. After a long period of disappointing performance due to various factors including the Sino-US trade conflict, the demise of cryptocurrencies and fears of a slowdown in global demand, the industry sprang up. growth course. Contrary to the decline in all previous recessions, the Philadelphia Semiconductor Index, a key industry index, rebounded sharply, eventually gaining more than three-quarters after the recession caused by the virus. out.
This is a direct result of global technology developments and exponential growth in data consumption. While some developments took a good form before the recession, recession continues to drive demand in high-tech businesses including cloud computing, data storage, data management. large and artificial intelligence.
Going forward, we could see further exponential growth in data management with the rollout of 5G mobile networks, internet of things, and machine learning.
While semiconductors previously primarily used in consumer electronics and automobiles – and therefore very cyclical – now they play a much larger and more important role in the broader range of Business, administrative and personal applications. In short, they have become the ‘staples’ technologies of economic activity with the potential for even more sustainable growth.
The standout businesses have grown in three main areas: semiconductor design, fabrication equipment manufacturing, and chip manufacturing. Supply chains are well established in advanced economies. While many of these firms have to invest large amounts of capital to update or create new capacity, profitability and cash generation are generally very high with a solid return on invested capital.
Despite the fact that many technology stocks remain at historic highs; I still believe that companies in this area are well regarded. I am not looking for “cheap” stocks but instead for stocks that are priced in accordance with their current and future sustainable growth.
Nasdaq’s two listed companies – Cadence Design Systems and Synopsys – provide leading software design technologies for the manufacture of integrated circuits.
Many manufacturers rely on them for advanced technology to develop new semiconductors. In addition to the dramatic growth in the industry-wide structure they enjoy, they also benefit from customers like Alphabet parent of Google, Amazon and Apple, companies that develop their own semiconductors and need support. expert assistance. Increasing demand from China is also becoming prominent for these designers.
The chip equipment supply chain also has the participation of a number of established companies. Two US corporations, Lam Research (listed on the Nasdaq) and Applied Materials, manufacture products and equipment. Thereafter, there was ASML listed in the Netherlands, formed out of a partnership with Philips and today operates independently as the largest and most technologically advanced photolithography system supplier on the market. world for semiconductor manufacturing.
These companies benefit greatly from customers who are expanding their own production capabilities, creating a record-breaking multi-year order book for these sophisticated equipment manufacturers.
There are a wide range of semiconductor manufacturers. American multinational technology company Nvidia is a particularly interesting example with a focus on 3D graphics, data centers and the cryptocurrency industries. Listed company Nasdaq did auction for Arm, a semiconductor design business based in the UK. While it is reported that this offer is still under regulatory scrutiny, this important deal could be in some form or another, transferring ownership from Japan’s SoftBank.
Jensen Huang, co-founder and CEO of Nvidia, is considered an industry leader and is expected to focus more on artificial intelligence and autonomous driving. In a way, Nvidia can be considered the Tesla of the semiconductor industry, often ahead of others in terms of technology.
Biden’s new administration appears to have no interest in reversing its predecessor’s grip on US firms’ high-tech trade with China, highlighted by debate about HuaweiChina’s giant electronics corporation.
The dispute with Beijing suggests that global chip production depends on a handful of predominantly Western, Taiwanese and Korean manufacturers and their technology, and the order has been firmly established as how.
Obviously it will take a very long time to disrupt the strategic positions of key companies, despite China’s efforts to increase autonomy in the semiconductor sector. Taiwan semiconductors is an interesting company as it is an important supplier to most countries, including China, with huge production capacity and a three-year $ 100 billion capital investment program.
Meanwhile, Intel, which has long been the chipmakers’ relationship, also recently announced a The program expands 20 billion dollars United States.
There are many intriguing opportunities in this sector: in a concentrated portfolio of 29 stocks with a strategic long-term orientation, we must be decisive in our selection and diligent. Although the semiconductor industry’s outstanding performance and its key role in most aspects of technology advancement have not been noticed by investors and well reflected in pricing. Equity, we still see good investment opportunities.
With global technological development perhaps less than half the way of a revolutionary multi-year growth cycle, our view is that there is still a lot left for strategic investors.
Gerrit Smit is a fund manager for Stonehage Fleming Global Best Ideas Equity Fund. It invests in Alphabet, Amazon, and Cadence Design Systems