Following a dramatic tech sell-off earlier this year and a protracted shortage of high-end computer chips, tech sector opportunities are once again presenting themselves to savvy investors, says a portfolio manager with Mackenzie Investments.
Brenda Nicholls, an assistant vice-president with Mackenzie Investments and co-lead manager, along with Martin Rose, of the Mackenzie GLC team’s science and technology fund, said high-performance computing is a secular long-term trend, regardless of short-term supply disruptions.
“The world needs very advanced, powerful, faster, and more efficient semiconductors,” she said. “One of the great opportunities for us right now, is we think company fundamentals are going to matter, even more so, as the speculative excess is curtailed.”
Speaking on the Soundbites podcast this week, Nicholls said semiconductors are the world’s fourth most-traded product, driven by the digitization that is transforming a wide range of industries, including automotive, telecommunications and consumer goods.
The recent shortage stemmed from a number of unrelated incidents: an escalating trade war between the U.S. and China which caused tech companies to stockpile inventory; a winter storm that cut power to a microprocessor plant in Austin, Tex., owned by Samsung Electronics Co. Ltd.; and a fire in Tokyo, Japan that heavily damaged a fabrication plant owned by Renesas Electronics Corporation, provider of about 6% of automotive chips worldwide.
The pandemic also continues to hinder global production while at the same time spurring rising consumer demand for chip-powered products.
Adding to supply chain challenges, automakers slashed their semiconductor orders in March 2020 when economies shut down due to Covid-19, only to reverse those cancellations when orders came roaring back a few months later.
“Once 2021 is fully reported, chip shortages will have wiped out over $200 billion globally for carmakers with production of an estimated 7.7 million vehicles lost or delayed,” Nicholls said. “In fact, research has shown over 169 industries have been touched by the shortage in some way and range from air-conditioning manufacturing and breweries to game consoles and medical devices.”
However, she’s optimistic that supply chain issues will soon be resolved.
“We believe the semiconductor shortages are likely to improve in the second half of this year as the overspending on goods reverts back to more normalized trends,” she said. “There have been numerous mentions of shortages on company conference calls this earnings season, but we get the general sense that we’re getting through the worst of it.”
In aggregate, the period from order to delivery is no longer lengthening, she said. Chip manufacturers are predicting improvements beyond the current quarter. And packaging, testing and assembly plants in Southeast Asia are expected to resume full-time operations as Covid becomes more controlled.
Nicholls said tech companies with strong revenue growth outlook, pricing power and the ability to generate free cash flow will be in favour this year.
She pointed to software names like Intuit Inc. and Adobe Inc. (both based in California). She also likes networking and cloud-computing companies like Arista Networks of Santa Clara, Calif.; Microsoft Corp.; Amazon.com Inc.; and Alphabet Inc.
As for manufacturers of high-end superconductors, she likes Advanced Micro Devices Inc. of Santa Clara, Calif.; Nvidia Corp. of Santa Clara, Calif.; Broadcom Inc. of San Jose, Calif.; and Texas Instruments Inc. of Dallas, Tex.
“There have been a few companies that have seemingly weathered the previous two years stronger than others,” she said. “Texas Instruments comes to mind, as they have traditionally been viewed as an industry barometer, given the breadth of their product portfolio and customer base. They raised inventory in the latter months of 2019 and were rewarded with strong sales growth as the pandemic accelerated demand. They are vertically integrated and manufacture about 60% of their own product, which is positive for their cost structure.”
The supply chain issues of 2021 have sparked discussions of a North American reshoring of chip manufacturing, she said. “However, we’re not entirely convinced that it’s wholly beneficial for the industry,” she said.
The facilities are incredibly complex and expensive, she said, and it will take at least two years before new semiconductors hit the market. Even then, those products are likely to be trailing-edge nodes – a measure of chip complexity — rather than leading-edge ones.
“The risk of an overcapacity build of legacy node production with inherently higher North American cost structures gives us pause,” she said.
“The companies that are able to design the very high-end, high efficiency, customized chips, those are where the real opportunities lie,” she added. “As the use cases of the conductors broaden out, the opportunities for investments broaden out as well.”
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This article is part of the Soundbites program, sponsored by Canada Life. The article was written without sponsor input.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
