Semiconductor down cycle presents good long-term opportunities, says Nomura’s Kawamoto

TheEdge Mon, Nov 20, 2023 04:56pm - 2 weeks View Original

KUALA LUMPUR (Nov 20): The recent weakness in semiconductor stocks due to it being in a down cycle presents an opportunity for investors to build positions for the long term, said Takeshi Kawamoto, senior equity analyst of Nomura Asset Management UK.

In the past, down cycles have been a good time to purchase semiconductor stocks, as the market anticipates a recovery when demand picks back up. He also said in the case of down cycles, weak end demand is usually accompanied by an inventory correction.

“An analysis of semiconductor cycle characteristics spanning the past 40 years has shown that a typical cycle has a duration of four years. This comprises three years of an upcycle, followed by a year of a downcycle.

“Currently, we find ourselves at an inflection point poised to enter an upcycle, which is projected to potentially extend until 2025 or 2026,” said Kawamoto.

There are good reasons why investors should consider putting their money in semiconductors.

Emerging technologies such as autonomous vehicles, artificial intelligence (AI), 5G and Internet of Things (IOT) are set to boost the growth of semiconductors in the next decade, Kawamoto said. This is as semiconductors are the basic materials needed to make chips, which are essential technology enablers.

“Semiconductors have also become strategically important to many governments around the world. Leadership in semiconductors has become synonymous with global leadership in a way.

Many countries are building out domestic semiconductor supply chains, which are in turn expanding the market,” he added.

“Investing a portion of assets in this important industry in a thematic way is a good way to take advantage of these trends.”

Investors who want to tap into the semiconductor sector can invest in the Nomura Global Shariah Semiconductor Equity Fund (NGSSEF), which was launched on July 25, 2022. The fund is focused on investing in the manufacturing ecosystem of semiconductors. This makes it
unique, as compared to other funds that have a broader investment universe.

The fund is also available to users through the Raiz Malaysia platform. The collaboration with Raiz provides increased exposure and offers investors the opportunity to access Nomura’s funds. Other distribution partners include FSMOne, Philip Mutual Bhd, UOB Kay Hian Securities and TA investment management.

Gaining traction

As at Oct 31, 2023, the one-year performance for the MYR share class of the fund has registered a 43.76% return. Compared to the benchmark return of 44.60%, the strategy underperformed its benchmark by 0.84%. The benchmark used is the NASDAQ Global Semiconductor Index (NGSI).

However, Kawamoto said there are instances in which the fund has overperformed and underperformed during the one-year period. For example, the fund registered a return of 17.09% compared to the benchmark return of 16.82% at the six-month mark.

Given the long-term strategy of the fund, it will focus on investment opportunities that capitalise on long-term secular tailwinds, such as artificial intelligence and autonomous driving, he added.

The strategy of the fund has remained the same over time, Kawamoto noted. The fund focuses on high-quality semiconductor companies that have intellectual property, pricing power, high growth, high profit margins and strong balance sheets.

Kawamoto said the fund shares a similar strategy to the existing Nomura World Industry Sector Investment Series World Semiconductor Fund, which has been long running in Japan since 2009, with an asset under management of around RM2.9 billion.

Nomura Asset Management UK Ltd is the investment advisor of the NGSSEF. The person responsible for managing the fund is Leslie Yap, managing director and head of investments at Nomura Malaysia.

Yap has over 19 years of industry experience in the area of funds management and research coverage. Previously, Yap was managing a Malaysian equities fund for a local insurance company, before relocating to a research house in Shanghai.

“[NGSSEF] adopts a detailed analysis of cash flow and other fundamentals to identify quality companies with strong competitive advantages, consistent cash return to shareholders, skilled management, a track record of attractive returns on capital and opportunities to make attractive reinvestments,” said Kawamoto.

The fund favours companies that have a competitive advantage through the attainment of intellectual property from years of research and development, he added. The top five holdings of the fund are TSMC, Nvidia Corp, Broadcom Inc, ASML Holding and Advanced Micro Devices.

As at Oct 31, the fund invested 63.96% of investors’ money in the US, 12.28% in the Netherlands, 9.20% in Taiwan, 6.54% in Japan, 5.86% in cash and others, and 2.17% in Germany.

Chinese semiconductor counters are absent from this fund. This is because the fund invests in companies included in the NGSI. In terms of the potential of Chinese companies in the semiconductor space, Kawamoto said Chinese companies may grow faster than their Western counterparts, as China builds its own semiconductor supply chain.

However, Chinese semiconductor companies may be overvalued, he added. This is because domestic investors have poured money into the sector, in anticipation of government support.

Cracks on the wafer

Kawamoto warned that investors should be prepared for current economic and geopolitical headwinds to negatively affect the fund.

“Slower economic growth amid the higher interest rate environment could weaken select semiconductor end markets, such as the automotive or industrial markets.

“Similarly, rising geopolitical tensions could weigh on the semiconductor market, potentially reshaping the global semiconductor supply chain and resulting in reshoring of manufacturing operations,” said Kawamoto.

There is a silver lining. The structural growth drivers such as AI, cloud computing and 5G underpin the long-term demand for semiconductor chips, even in economic slowdowns.

Based on the experience of the existing fund, Kawamoto noted that there have been four material drawdowns. In each drawdown, the subsequent recoveries have been sharp. This was seen in the excitement surrounding generative AI spending in 2023, which led to a rebound.

“By remaining invested in fundamentally strong companies through down cycles, the strategy benefited from the sharp inflection in the performance of semiconductor stocks,” he said.

The Nomura Global Shariah Semiconductor Equity Fund (NGSSEF) is suitable for investors who are looking to achieve long-term capital growth, according to its product brochure.

The NGSSEF has two share classes which are the MYR class and the USD class. The minimum investment amount is RM1,000 for the MYR class and US$ 1,000 for the USD class.

The minimum subsequent investment is RM500 for the MYR class and US$500 for the USD class.

The fund has a sales charge of up to 5% and an annual management fee of 1.8% per annum. It is also worth noting that the distribution of income, if any, is incidental.

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