An emerging markets equity fund that’s beating 98% of its peers is betting on Asia’s chipmakers, even as they struggle with slumping demand and excess inventory.
(Bloomberg) — An emerging markets equity fund that’s beating 98% of its peers is betting on Asia’s chipmakers, even as they struggle with slumping demand and excess inventory.
The inventory correction will “continue probably during the first half of this year” but there should be some “demand recovery from second half this year along with the seasonality,” said Young Jae Lee, a senior investment manager at Pictet Asset Management Ltd. who co-manages the Global High Yield Emerging Equities Fund. “In that sense, we may see an earnings trough during the first half.”
Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. are the top holdings in the $665 million fund, which has returned 11% this year. The fund has increased its overweight position in the EM Asia tech sector since late 2022, particularly in hardware firms, London-based Lee said. The sector now makes up about a quarter of the fund’s holdings.
While soaring inflation, higher interest rates and US recession worries have damped electronics demand and sector earnings, investors see production and cost cuts as antidotes to the oversupply conundrum. TSMC slashed its capital spending plans for the year, while Samsung is reducing its memory chip output after its lowest quarterly profit since the 2009 financial crisis.
“Now that production cuts are happening across the memory industry and companies are printing the biggest ever losses since the Lehman crisis, supply and demand will return to balance within the next six months,” Lee said in an interview with Bloomberg News this week. “For typical cyclical players, you want to go against the tide, so you buy at the trough and sell it at the peak.”
Major industry players like Samsung and TSMC are better positioned to benefit from a demand recovery as they have more market share and stronger balance sheets, according to Lee. TSMC could ride on the artificial intelligence frenzy given its near-monopoly status as the world’s largest chip foundry, as a wider adoption of AI would require more higher-end chips, Lee said.
Global chip stocks have rebounded from their lows in October, with Samsung and TSMC rising 20% and 14% respectively this year. That’s lifted tech-heavy markets such as South Korea and Taiwan, helping them trounce most of their EM peers in 2023 after a year of underperformance.
The outperformance of China and other North Asian markets will likely continue for the rest of 2023 given the sustained boost from China’s reopening, said Lee. He likes high-yielding names in China, including white goods, sportswear, financials and real estate.
“China’s reopening is not just a one-day thing,” Lee said. “It’s a bit slower than expected, but it will continue throughout this year and also next year.”
While a potential peak in US dollar and interest rates bodes well for the region’s growth shares, he still sees dividends as an important strategy this year given high volatility in the market.
“There is still a high chance of US recession. So the outperformance of growth stocks may not be a straight line,” he said.
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