Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Semiconductors – The key to the inflation story
As the world gets ready to emerge from its Covid hibernation, low inventory levels, supply chain disruptions and booming demand for semiconductor chips have brought about an economic dislocation which is receiving considerable attention.
Portfolio Manager Denny Fish and analyst Shaon Baqui at Janus Henderson Investors have released a research note for investors, outlining the significance of semiconductors in forming the foundation of all modern-day electronics such as smartphones, computers, automobiles, white goods and smart devices. The tiny chips are vital to so many industries: they power almost everything in our daily lives.
According to the authors, chipmakers are scrambling to increase production to fill the gap. Optimistic forecasts are saying mid-2022 is when this might happen. Others say it won’t fully subside until perhaps early 2023, given the difficulty and complexity required to manufacture semiconductors. It also means that capacity cannot be replicated that easily.
During the pandemic, rapid digitisation of the global economy turbo-charged a rise in demand for semiconductors for use in cloud computing, laptops, gaming consoles and Wi-Fi routers. The automotive sector was hit the hardest, as it was unable to source any spare capacity. The crux is that the semiconductor industry is unable to meet chip demand any time soon.
The report highlights “a convergence of factors has led us to conclude that the current chip imbalance won’t be resolved as easily as in earlier cycles. Foremost, the demand for semiconductors has hit an inflection point and, in our view, there is no going back as an increasing share of global economic activity occurs digitally. Remote work has created incredible demand for the complex chips that power cloud computing, artificial intelligence (AI) and developments with the world’s automotive fleet, including advanced driver assistance systems and vehicle electrification.”
And demand for these chips will continue to rise as technology advances. For example, up to five times the number of semiconductors are used in electric vehicles over internal combustion engine vehicles. As well as automotive manufacturers and internet-of-things (IoT) device producers, the shortage has far-reaching consequences that can shut down production in many global industries that use machinery.
According to Janus Henderson, “On the supply side, we believe the current imbalance will create even more tailwinds for the semiconductor capital equipment makers that enable chip production. Should markets become more localised, the number of buyers for this complex machinery will likely grow. While we are mindful of near-term perturbations surrounding supply and demand, we believe the hunger for analogue chips will continue to grow as digitisation results in ever-higher levels of semiconductor content across a broad range of applications. Finally, we believe secular demand for the processors, accelerators, and networking chips that power AI and cloud computing services will continue to strengthen in the years to come as the world moves toward a digital economy.”
Janus Henderson concludes by saying, “the semiconductor shortage has proven to be a high-profile pain point for the global economy, and it shows little sign of abating. While the nuances of the industry structure and semiconductor cycle are typically the domain of tech investors, the global economy’s increasing dependence upon the complex functionality of cloud- and AI-enabling chips as well as process-oriented analogue chips, means that further industry developments should command the attention of all financial market participants.”
