Time for tech in 2023
08 Nov 2022
As the world faces a shortage of semiconductor chips brought about by several factors, the expected increase in demand has left investors wondering if buying pressure could return to the semiconductor sector.
The supply crunch has been brought about by developments over the past few years as global megatrends such as automation, electrification and connectivity propelled rising demand for semiconductors.
The lockdowns imposed globally over the past two years have also played a major role in hastening the adoption of online-based trends like remote working, eCommerce and virtual learning, leading to a significant demand surge for chips powering electronic devices.
The squeeze in supply may have also been exacerbated by the decision taken by the Biden administration last month to impose restrictions on the export of chip-making technology to China, with regulations obligating all United States-based tech firms to cease supply of chip-making equipment to Chinese chipmakers unless they obtain an approval licence.
abrdn Islamic Malaysia Sdn Bhd chief executive Gerald Ambrose, however, opined that the supply deficiency following the mandates imposed by the United States would be confined to more sophisticated chips, especially those which the United States government believes could have military applications.
Despite seeing a number of positive developments in the local electronics sector, such as growth in foreign direct investment that would indicate rising demand coupled with the attractive valuations of certain counters, Ambrose told StarBiz it would be optimistic to expect a buying fervour to return to the semiconductor market at present given the skittishness of the market.
“Western multinational companies would prefer Malaysia for manufacturing in view of the growing ‘taint’ of being based in China. Cost of qualified software, automotive and electrical engineers are also significantly lower here.
“However, we are seeing a rising number of branded end-users starting to downgrade future volume forecasts, especially in the phone segment,” he said.
As a number of lead indicators, such as book-to-bill ratios, purchasing managers’ index (PMI) and Asian export growth are also heading south, Ambrose said, Malaysia would not be able to buck the short-term downward trend, even if its own PMI and export numbers are relatively better among its regional peers.
Meanwhile Malaysian Semiconductor Industry Association president Datuk Seri Wong Siew Hai believes how semiconductor stocks will fare as a result of the supply jam will depend on how quickly industry demand recovers.
As to that, Wong told StarBiz that it is difficult to predict at the current juncture, but noted that a clearer picture could present itself in the second half of 2023.
“The International Monetary Fund has downgraded its global gross domestic product growth forecast to 2.7% for next year from 2.9% back in July, indicating it is seeing a slowdown which would definitely impact the semiconductor industry.
“How quickly demand would return would hinge largely on global events as well,” he said.
He also highlighted that there has been a correction in the consumer products sector, as has been reported by some research houses such as RHB Research that the 30-month consecutive growth in the global semiconductor sales has ended, with August posting slower figures.
“The concerns about the pending recession and inflationary fears could serve to dampen consumer demand over the near-term, and it has affected the stock prices of many multinational companies, although this appeared to have stabilised,” Wong said.
Wong is of the view that the United States restricted tech export to China would be something Malaysian semiconductor firms could take advantage of.
“US semiconductor and tech companies located in China may need to move some of their activities out of that country, and Chinese companies would also need to find ways to ship their products to avoid additional tariffs. This means there are opportunities for Malaysian firms to benefit,” he noted.
While maintaining a prudent stance on the sector in the near future, citing headwinds such as the US-China trade skirmishes as well as the Russia-Ukraine conflict, Wong is positive on semiconductors and believes prospects are bright over the next five years, as it is an industry that is in demand.
Echoing the cautious short-term but bullish longer term view of Wong and Ambrose for the semiconductor sector, fund manager Danny Wong feels its supply and demand dynamics have improved against the backdrop of slowing demand in consumer electronics, even in the face of the latest US-China trade restrictions.
Wong, who is chief executive of fund managing firm Areca Capital Sdn Bhd, said: “Currently, the semiconductor sector is in the stage of inventory adjustment. The buying fervor is unlikely to return in the near term but it could come back more strongly in the longer term.”
He projected that the industry should achieve supply and demand equilibrium in the next few years, with additional supply being provided by an increasing number of foundries coming online globally.
“We are positive on the growth of industry over the next few years. In the short term we are cautious on the sector and would be selective on those with strong fundamentals but value emerged with price weakness recently. We are broadly positive over the sector in the long-term,” he told StarBiz.
As industry experts and observers remain prudent over semiconductors at present, it is understandable that they are advocating investor patience before making impulsive jumps into any particular counter for the moment.
Source: The Star