I believe that electronics sector will underperform in this earnings season, as many people has accelerated the renewal of their electronic devices during the early days of the COVID-19 pandemic, as work and study from home were the default work and study modes.
People were forced to upgrade their electronic devices to improve their productivity for remote works and studies, that they would otherwise have deferred for a couple of years if the old devices were still working and not due for replacement yet. Hence, many do not feel the need now to replace these relatively new electronic devices soon.
Furthermore, with global economy heading into a downturn on the back of an increasingly hawkish Fed determined to rein in the surging inflation even at the expense of triggering a recession and inflicting much pain to the economy, companies are also shelving their business expansion plans, softening global demands for electronics.
At the same time, geopolitical tensions including US’ restrictions on microchips sale to China is also going to have a repercussions across the global chip industry which counts China among its biggest markets and one that is growing rapidly.
The highly cyclical characteristics of the semiconductor industry does not help either. The earlier global supply disruptions of semiconductor chip have prompted many semiconductor foundries to invest heavily to build new factories and expand their capacities, as they anticipate demand to outstrip supply in the foreseeable future.
However, with global demand softening, the new factories and additional capacities are going to lead to a supply glut down the road.
As the previous worldwide chip shortages during the onset of COVID-19 had caused much hardship in the economy, especially the automotive industry which witnessed numerous shutdowns of car makers halting production and retrenching workers for lack of essential semiconductor chips that drive modern cars which are equipped with increasingly more and more sophisticated electronic components, securing domestic semiconductor supply has become a prime importance for national security in many countries, including the United States that has found itself lagging behind. These countries are employing both carrots and sticks to push semiconductor foundries to set up new factories within their borders, that may not necessarily be the most efficient places to run semiconductor foundry operations, for supply to domestic markets.
With business decisions affected by political reasons, some expansion plans are carried out without compelling financial and economic justifications, heightening operating costs and worsening oversupply.
As much of these new capacities are still in the process of construction and installation, I believe that the worst supply glut for electronics has yet to come.
Rising interest rates as central banks around the world hike rates to rein in surging inflation also increase borrowing costs and depress asset valuations. This is especially detrimental to semiconductor foundries which are heavily capital-intensive and borrow to finance their expansions.
Until global electronics demand recovers, which I believe to be unlikely soon, I’ll stay away from the electronics sector in the meantime.
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