Investment Adventures in Emerging Markets

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Cyclical & Secular Chip Boom: Supply Shortages Impacting Economic Recovery

The COVID-19 pandemic has accelerated a number of existing technological trends, and emerging markets have been at the forefront. Semiconductor chips are a crucial to many technological advancements, providing computing power to our phones, cars and more. Our Emerging Markets Equity team discusses how shortages of chips during the pandemic have impacted the global economy.

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Global chip shortages are drawing attention to semiconductors, which are essential for modern life. These chips provide the computing power in phones, cloud data centers, and home security systems, to name a few. The cost of electronics in an automobile has increased from 5% of the total in 1970 to 40% in 2020.1 The importance of chips to our economies is evident in the current global shutdowns in auto factories; this is driven by a cyclical boom combined with secular acceleration in demand. For example, automaker Ford has stated it expects to lose up to 50% of second-quarter production on supply shortages.2

Cyclical Boom

The world is rapidly emerging from COVID-19, while stimulus is adding fuel to the fire. US gross domestic product (GDP) growth is expected to be the highest in decades this year—the International Monetary Fund’s latest forecast is for GDP growth of 7%, while emerging market growth could be even higher, particularly in emerging Asia, where GDP growth is forecast above 8%.3 Consumer spending is surging, driving demand for products in which electronics are ever more pervasive.

Secular Acceleration

The pandemic has accelerated the adoption of technology. Working from home boosts the need for data centers and cloud computing. In certain Asian economies, track-and-trace systems make smartphones ever more essential for day-to-day activity, and entertainment—whether video streaming or gaming—continues to inexorably shift online.

Asian Companies Dominate

Taiwanese and South Korean semiconductor firms dominate the global industry with their strong manufacturing capabilities. Moreover, their clout has generated the cash for them to ramp up investments and widen their competitive advantages amid booming demand for chips from high-performance computing, bitcoin mining, autos, and other businesses. By comparison, Western semiconductor firms have struggled to keep up, whether in innovation or capital expenditure.

The production of a semiconductor requires two distinct phases: design and fabrication. Historically, many chip designers outsourced the manufacturing to companies with specialized manufacturing prowess and lower costs, including Taiwan Semiconductor Manufacturing Company (TSMC), which has grown to be the largest foundry globally. By mid-2020 TSMC had produced its one-billionth defect-free 7nm computer chip. US-based Intel is one of few remaining “integrated” semiconductor companies that fabricates the chips it designs, and by contrast, has yet to start mass production of its equivalent chip.

We think this example illustrates how emerging market companies are increasingly underpinning innovation and are key enablers of global digitalization.

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What Are the Risks?

All investments involve risks, including the possible loss of principal. The value of investments can go down as well as up, and investors may not get back the full amount invested.  Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Investments in foreign securities involve special risks including currency fluctuations, economic instability and political developments. Investments in developing markets involve heightened risks related to the same factors, in addition to those associated with their relatively small size and lesser liquidity.

Past performance is not an indicator or guarantee of future performance.

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1. Source:  Deloitte.

2. Source: AP, “Ford posts profit, says chip shortage may cut production 50%,” April 28, 2021.

3. Source: International Monetary Fund, US forecast as of July 2021; forecast for emerging Asia is as of April 2021, with China at 8.4% and India 12.5%. There is no assurance any estimate, forecast or projection will be realized.

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