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INVESTMENT FOCUS
August 2021

Semiconductors: Investing in Tech's Future

Semiconductors have been in the spotlight, with news of shortages making global headlines. How can one approach investing in this vast industry? We explore two specific segments – analog chips and semiconductor equipment manufacturers.

Why is the world facing such a huge shortage in semiconductors?

Tomasz: Semiconductors are the “brains” of electronic devices, helping to control the flow of electricity. They are the basis of the digital economy and are used in almost every industry. Semiconductors are produced by highly specialised companies, such as Texas Instruments, Analog Devices and Nvidia .
The massive shortage we are currently witnessing erupted during the COVID-19 pandemic, when demand for semiconductors skyrocketed, as people began upgrading laptops, smartphones, and even cars. Although semiconductor companies responded quickly to this surge in demand, the lead time was too short as it typically takes up to six months to produce an advanced chip. In addition, there was almost no inventory in the channel before the crisis.
As a result, some components are now facing an unprecedented shortage, probably the largest in the history of the chip industry. The automotive sector in particular has been hit hard, partly due to its weak supply chain management. It is estimated that because of the chip shortage, the auto industry was unable to produce 4 million cars, resulting in a loss of USD 100 billion in revenues2.

What is your investment approach towards semiconductors and how are you positioned in this space?

Daniel: Semiconductors are an important exposure in the JSS Sustainable Equity – Tech Disruptors fund. There are two key groups of companies that we focus on.
Firstly, there are analog semiconductors, which give us exposure to the electric vehicle (EV) and smart mobility trend. The semiconductor content in an electric vehicle is worth around USD 1000 per car, three times as much as in gasoline cars. Therefore, the EV market is a huge growth opportunity for semiconductor firms, and we want to be exposed to that. In this group, our key picks are stocks like Analog Devices, Infineon and STMicroelectronics¹. Besides being sustainable, these companies also fit our investment criteria of having strong business models with competitive advantages and high barriers to entry.
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Source: McKinsey, Mobility trends: What’s ahead for automotive semiconductors, April 2017
Secondly, we also focus on semiconductor equipment manufacturers, which make the machines needed to build chips and benefit from two important trends: demand for more complex chips, and a strong shift towards localisation.
As trends like artificial intelligence, and the Internet of Things become more widespread, demand for more complex chips will increase and more advanced machines will be needed in the manufacturing processes of such chips. There are very few companies that can produce these machines so it is an oligopolistic market with high barriers to entry.
Additionally, we are observing a strong localisation trend with a big push in the US and Europe to build up local semiconductor capacity, in order to reduce their dependence on critical components from Asia.
Both trends support the growth and revenue outlook for equipment makers. Our key holdings in semiconductor equipment makers are Applied Materials and Tokyo Electron¹.

Semiconductors also play a crucial role in the development of disruptive technologies, such as cryptocurrencies (cryptos). However, cryptos such as Bitcoin have been criticised for being environmentally unfriendly. What are your thoughts on this and how does this impact semiconductors and other industries?

Tomasz: We have seen shocking statistics about Bitcoin’s energy consumption. For instance, its mining consumes more energy than Switzerland, or that the carbon emissions from one Bitcoin transaction is equivalent to watching 120'000 hours of YouTube videos.
The reason for Bitcoin’s high energy consumption is that its underlying technology uses significant computing resources. In fact, this is one factor that has been boosting the short-term sales of Nvidia1, a producer of computer processing chips and one of our portfolio holdings.
However, some cryptos are moving towards a more eco-friendly mining approach. Ethereum, the second-largest crypto after Bitcoin, is migrating to a more energy-efficient mechanism that requires less computing power.
Moreover, a new, highly efficient storage-based concept is also emerging and is driving the strong share price appreciations of hard- drive companies, such as Seagate and Western Digital¹. The latter is a portfolio holding of ours.
These developments might ultimately change the perception on the future of blockchain-based technologies, and extend their application beyond payments to other areas – for example, music copyrights protection, financial systems for developing countries, supply chain monitoring, and cybersecurity.
   
1. The companies presented are provided as example investments and may or may not be part of the investment portfolio of the fund. The examples are given for illustrative purposes only, do not constitute financial advice, and do not account for individual circumstances of potential investors.
2. KPMG Report, “Surviving the Silicon Storm”, 2021.
   
*Please note that the JSS Sustainable Equity – Tech Disruptors fund does not invest in cryptocurrencies.
This article does not constitute a request or offer, solicitation or recommendation to buy or sell investments or other specific financial instruments, products or services. It should not be considered as a substitute for individual advice and risk disclosure by a qualified financial, legal or tax advisor. Information containing forecasts are intended for information purposes only and are neither projections nor guarantees for future results and could differ significantly for various reasons from actual performance. In particular, neither the Bank nor its shareholders and employees shall be liable for the views contained in this document. The views and opinions contained in this document, along with the quoted figures, data and forecasts, may be subject to change without notice.

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