2017 was an exceptionally good year for the global Technology sector, especially the semiconductor companies as we saw surging global demand for the Electricals & Electronics (E&E) products. Locally, the Technology sector was the best performing sector in 2017, with the Bursa Malaysia Technology Index delivering more than 89% return last year, outperforming the FBMKLCI Index significantly. Although the Technology sector ended the year with a remarkable return in 2017, the performance of the semiconductors counters was affected by the strengthening of Ringgit toward the end of last year. In addition, after stepping into 2018, the local semiconductor-related stocks were further sold down (see figure 1) due to the disappointing iPhone sales as well as the escalating trade war tensions between US and China. Hence, in this article, we would like evaluate the outlook for the local Technology sector.
|Figure 1: YTD Index Performance
Global Semiconductor Sales Hit Record High
While everyone is expecting a slowdown in the global semiconductor sector amid the expectation of declining global smartphone sales in 2018, it has delivered a rather strong and consistent growth rate so far with the global semiconductor sales growing more than 20% for 14 consecutive months.
According to the Semiconductor Industry Association (SIA), the worldwide sales of semiconductors reached $38.72 billion in May 2018 (see figure 2), representing 21% of growth rate in comparison with the corresponding quarter of the preceding year. On month-on-month basis, the global semiconductor industry continued to post positive growth rate for three consecutive months despite the increasing trade war tension between US and China.
After recording the robust YTD growth, SIA has upgraded the 2018 global semiconductor sales forecast last month, by 6% to USD 463.4m, which would mark the industry’s highest-ever annual sales and a 12.4% of increment from the 2017 total sales. Hence, given the strong outlook for the global semiconductor sector, we believe the local technology counters are likely to see more meaningful recovery moving forward.
|Figure 2: Global Semiconductor Sales
Rising AI Technology Boosts Semiconductors Demand
Globally, across many industries, we have been seeing more and more disruptions caused by the rise of Artificial Intelligence (AI), which is one of the latest technology that could mimic human’s ability to learn, analyze and to make decision. In fact, some even know it as the job-killing disruptive technology as it enables businesses to automate some of the current occupations, reducing the reliance on human capital.
However, there is one sector that is expected to ride on the rapidly rising trend of the AI technology – semiconductor sector. In recent year, we have witnessed an increasing usage of AI technology in every industry especially for sectors like the manufacturing, healthcare, logistics and automotive.
As such, with the increasing usage of AI technology, it would eventually spur a parallel growth in demand for semiconductors.
Weak Ringgit Is A Blessing For Technology Sector
Ever since the strong appreciation of Ringgit against US Dollar in the last quarter of 2017, analysts have generally downgraded the earnings outlook for the semiconductors players as majority of them generate their revenue and earnings overseas. As such, the strengthening of Ringgit will translate into higher foreign exchange losses which would eventually hurt the earnings prospect of these top exporters.
In the upcoming quarterly earnings report, although the unfavorable exchange rate would continue to contribute to the decline in profit on year-on-year basis, the magnitude of foreign exchange losses is likely to trend lower as we move toward the end of the year due to the short-term weakness in Ringgit.
Reason being, from a short-term perspective, we do not expect any material foreign fund inflow into the local equity and bond market, should the US Fed continue to tighten the monetary policy (Fed’s dot plot showed 2 more interest rate hike in 2018). On top of that, the foreign direct investment in Malaysia is also likely to take a pause at least until a greater clarity from the new government policies, which is expected to take another 3 to 6-month time. Hence, Ringgit is likely to experience some short-term pressure, which is a blessing to the local Technology sector.
All in all, while the current prospect and valuation for the Technology sector looks attractive for investors due to the YTD hefty sell-off, we believe that the long-term growth story still remains intact with the rising AI technology being widely implemented across many industries which would eventually drive the global demand for the semiconductor products.
For investors who want to ride on the potential rebound in the local technology sector, they can consider
Interpac Dynamic Equity Fund or
Interpac Dana Safi where both the funds have about 41% and 39% of exposure in the local Technology space. However, investors should also bear in mind that both the funds have a concentrated exposure in the local small to mid-cap stocks, hence, we would like to advise investors to include the fund as part of their supplementary portfolios, with not more than 10% allocation of their overall portfolios.