Are Semiconductors Ready To Break Out? We Consider The SMH ETF.
Read on for short- and longer-term price targets and risk management ideas.
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Semiconductor Outlook
Semiconductor is in a tug of war between the Great Powers. Broadly;
The bulk of accumulated intellectual property lies with US domiciled companies, save for manufacturing ('fabrication') IP of which the leader is a Taiwanese company
The trend in manufacturing volumes has been that US companies have exported fabrication to Taiwan (using TSMC / TSM 0.00%↑ ) and China (using SMSC) amongst others.
As part of the move to merchant manufacturing, design companies in the US have shared intellectual property with manufacturers in China and elsewhere. This IP has become weaponized as China has become a 'real boy' in the eyes of the West ie. no longer viewed just as a large market for luxury goods and a large supplier of low cost and lightly regulated labor, but in fact a genuine contender for global leadership. (This has, of course, dawned on the West a little late. Your standard underestimation).
It's always possible that the US and China come to actual blows but more likely is a long drawn out series of battles for economic and technological supremacy. And semiconductor is the first act of this particular kind of war.
This is the background to the US CHIPS Act, which is a way to legally state-aid US semiconductor companies into reshoring fabrication.
And it's the background to the Buffett investment in TSMC (TSM) which is a backdoor way of the US placing a protective ring around Taiwan without actually sending ships or writing so much as a dollar check from the White House.
Semiconductor volumes will grow as the economy grows - more so in fact since the electronification of the world remains early. Long term, semiconductor is always a great sector in which to invest if you (1) don't take concentrated vendor risk and (2) don't bet on one or another particular technology gaining commercial momentum. Which is why semiconductor sector ETFs can appeal. You must however get your timing right. The combination of economic cycles, long lead times for manufacturing rampup in new generation technologies, and general market macro factors mean that if you buy semiconductor at the wrong time you can be deeply out of the money for a very long time. And if you buy at the right time you can print free money for a few months at a time.
So let's take a look at whether the time is right to be long, or short, or do nothing as regards this sector. We’ll use SMH 0.00%↑ , probably the leading semiconductor sector fund.
For our paying members, what now follows includes our commentary on the fund, our price targets and risk management ideas.
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