Earlier this month, I wrote to you about how the problems with the global supply chain are getting worse amid the ongoing Covid-related lockdowns in China.
These lockdowns are reportedly impacting about 328 million people in at least 40 cities across the country.
Manufacturing centers, financial hubs, and some of the world’s largest container ports have shuttered (or operations are severely inhibited). Entire industries have ground to a halt.
This is having a huge knock-on effect on global trade. That’s because China is the world’s largest exporter. It accounts for 15% of global exports.
And as I told you earlier this month, 18% of the goods the U.S. imports come from China. And for computers and electronics, that number rises to 35%.
I promised to go into more specifics on how the situation in China and global supply issues could affect some of our key investing themes…
Today, I’ll tell you about one key industry that is reeling from these shutdowns. It affects practically every facet of our lives.
And its impact will be felt across each of our investment themes – New Energy, Infrastructure, Transformative Technology, Meta-Reality, and New Money.
Yet, the market hasn’t caught on to the huge opportunity this presents…
And that distortion means it’s a great time for you to position yourself to profit…
Lockdowns Will Increase Lead Times Even Further
Semiconductors, commonly referred to as chips, are used in every industry – from tech to manufacturing, agriculture to travel, entertainment to banking. They are the lifeblood of the modern digital world.
So a continuous and reliable supply is vital. Any delay can slow production.
Before the pandemic, the time between ordering a chip and its delivery was about 11-12 weeks.
But that jumped sharply as the effects of extensive global Covid lockdowns took hold. In July 2021, the lead time for semiconductors hit a record high of 20.2 weeks.
And by March 2022, it had reached 26.6 weeks, as you can see in this chart.
Now, the recent lockdowns in China are kicking it into higher gear.
China accounts for 9% of the market for global chip sales and about 40% of the world’s outsourced semiconductor assembly and testing. And according to the Semiconductor Industry Association, China is on track to capture 17% of global semiconductor sales by 2024.
Shanghai, China’s biggest city and a major hub for semiconductor manufacturing, has been in lockdown since March. Up to 40 other cities are in full or partial lockdown.
As a result, semiconductor production in China dropped 5.1% in March and a further 12.1% in April.
Now, Chinese authorities are talking about lifting some restrictions in Shanghai next month. But China is sticking with its zero-Covid policy. So any increase in case numbers could see lockdowns reinstated at any time.
This means the lead time for semiconductors will continue to feel the effects of China’s lockdowns in the coming months…
The Bottom Line Is Taking a Hit
Semiconductors are key components in many of the devices we use every day, including our laptops, tablets, cars, and smartphones.
So any shortage or delay in their delivery means manufacturers can’t get their products to market as quickly as before. And this hits their bottom line…
Even Apple is feeling the effects. It estimates that the global chip shortage could cost it about $4 billion to $8 billion in sales this quarter.
And many carmakers, including GM and Toyota, have had to cut production as a result of the chip shortage.
Sales at Toyota, Ford, Honda, Hyundai, and Kia have dropped by double digits amid the chronic chip shortage.
Overall, U.S. light-vehicle sales fell 17% to about 1.26 million in April from a year earlier.
Chip Makers Not Making Hay While the Sun Shines
Now usually, a shortage like this amid rising demand would be great news for the companies supplying the scarce resource.
And semiconductor manufacturers have taken advantage by increasing prices by up to 25%.
In a normal market, you would expect the shares of these companies to shoot higher. But this market is anything but normal…
Covid, the lockdowns in China, the war in Ukraine, the global shortages of everything from baby formula to fertilizer, the Fed’s aggressive plans to bring down inflation. Need I go on?
All these factors are injecting a huge amount of volatility into global markets. At writing, the S&P 500 is down 18% year-to-date. The Dow is down nearly 14%. And the tech-heavy Nasdaq is down almost 28%.
The semiconductor industry is one sector that’s taking a beating as a result.
The PHLX Semiconductor Index (SOX) tracks the industry’s leading companies, including Advanced Micro Devices, Nvidia, and NXP Semiconductors. It has plunged nearly 30% so far this year.
This is mainly due to the broader headwinds for the technology sector.
But I think investors are missing the big picture when it comes to semiconductors.
And that spells opportunity for us. Here’s why…
Semiconductor Demand Will Continue to Grow
In 2021, global semiconductor revenue increased by 25% to $614 billion after the rebound from the Covid-19 crisis.
According to market research firm IC Insights, semiconductor sales in 2022 will increase by 11% to $680 billion. This would mark the third consecutive year of growth, as you can see in the next chart.
And global research firm McKinsey estimates that the semiconductor industry will become a trillion-dollar industry by 2030.
This makes sense. We’re buying more gadgets today than ever. Whether that’s a smart TV, the latest smartphone, or a new Tesla, these devices will continue to require increasingly more powerful chips.
In short, I believe demand for semiconductors will continue to grow, regardless of any short-term jitters.
And the supply crunch makes the industry a strong investment target right now…
What This Means for Your Money
If you’ve been with us for any amount of time, you’ll know that market distortions almost always spell opportunity. The semiconductor space is a prime example of this.
It’s a long-term technology trend that has ended up on a deep-discount rack, thanks to the shutdowns by the Chinese authorities.
So how do you position yourself to profit from this?
You can consider getting exposure to iShares Semiconductor ETF (SOXX). It tracks the performance of the PHLX Semiconductor Index (SOX) I mentioned above.
SOXX is a straightforward investment you can access with a brokerage account. It has about $7.3 billion of assets under management. And it has 30 stock holdings, including leading chipmakers Nvidia (NVDA), Advanced Micro Devices (AMD), and Intel (INTC).
SOXX is down 26% year-to-date. That’s broadly in line with the 28% drop for the Nasdaq.
Though I do still expect some choppy times ahead for this sector and the overall market, I think we’re currently at an attractive entry point for a longer-term investment in the semiconductor industry.
Happy investing, and I’ll be in touch again soon.
Editor, Inside Wall Street with Nomi Prins
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