Semiconductor ETFs climb despite fears of an industry ‘down cycle,’ Pelosi trips to Taiwan

By Christine Idzelis

Taiwan manufactures ‘more than 60% of the world’s semiconductors,’ says Sevens Report

Battered exchange-traded funds focused on semiconductor stocks were trading higher Tuesday afternoon, despite concerns about a “down cycle” in the sector and US House Speaker Nancy Pelosi’s visit to major chip-producer Taiwan.

The SPDR S&P Semiconductor ETF (XSD) was up 1.2% Tuesday afternoon, while the VanEck Semiconductor ETF (SMH) and iShares Semiconductor ETF (SOXX) each rose around 0.2%, according to FactSet data, last check.

Taiwan manufactures “more than 60% of the world’s semiconductors,” wrote Tom Essaye, founder and president of Sevens Report Research, in a note Tuesday. “If China invades Taiwan and takes over all these manufacturing facilities, they will essentially have major economies that depend on semiconductors over a proverbial barrel.”

Wells Fargo Investment Institute warned in an investment strategy report Tuesday of increased risks for “an inventory-led correction for the semiconductor industry,” citing a recent forecast from a foundry in Taiwan.

“Our views were confirmed when the largest semiconductor manufacturing foundry in Taiwan recently shared its forecast of a broad semiconductor down cycle, led by an inventory correction cycle expected to occur from the second half of 2022 through the first half of 2023,” a Wells Fargo equity sector analyst wrote.

Read:Chip sales stay hot, but analysts warn of impending freeze

Also see:Why semiconductor stocks are ‘almost uninvestable’ despite record earnings amid a global shortage

Shares of Taiwan Semiconductor Manufacturing Co. (2330.TW), which makes chips used in personal computers, communications systems, automotive and industrial equipment and consumer electronics, were up 0.1% in afternoon trading Tuesday but down around 28% so far in 2022, according to FactSet data, at last check.

Semiconductor-focused exchange-traded funds also suffered this year.

The VanEck Semiconductor ETF is down more than 22% so far in 2022, while the SPDR S&P Semiconductor ETF and iShares Semiconductor ETF each tanked more than 24%, according to FactSet data, based on Tuesday afternoon trading.

“As the US Federal Reserve aggressively raises interest rates to combat inflation, eventually leading to decelerating economic growth, we believe risks have increased for demand weakness to spread from low-end consumer personal computers and low-end smartphones to other semiconductor end markets within the technology economy at some point later this year or early next year,” the Wells Fargo analyst said in the investment strategy report.

“From a sub-industry perspective, within the information technology sector, we continue to favor the semiconductor equipment, software, IT services, and networking equipment sub-industries,” the analyst said.

Shares of Advanced Micro Devices Inc. (AMD) were up 3% Tuesday afternoon, while Nvidia Corp. (NVDA) rose 1% and Micron Technology Inc. (MU) edged up 0.1%. Intel Corp. (INTC) shares fell around 2% in Tuesday afternoon trading, FactSet data show, at last check.

Speaker Pelosi arrived in Taiwan Tuesday morning Eastern Time, a widely watched trip that China was warned against making as tensions climb between the US and Beijing. She became the highest-ranking US official to visit the self-ruled island claimed by China in 25 years, the Associated Press reported Tuesday.

Read:Nancy Pelosi’s plane to Taiwan was the most-watched flight in the world

US stocks were down Tuesday afternoon in a choppy trading session as investors weighed tension with China and comments from Fed officials on central bank rate hikes. The Dow Jones Industrial Average fell 0.9%, while the S&P 500 slipped 0.4% and the Nasdaq Composite gained 0.1%, according to FactSet data, at last check.

-Christine Idzelis


(END) Dow Jones Newswires

08-02-22 1534ET

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