The semiconductor market is likely to pick up towards the end of the year but the scale of the recov...
The semiconductor market is likely to pick up towards the end of the year but the scale of the recovery will not reach the heights of previous bounce-backs, according to Henderson Global Investors.
David Greenhalgh, on Henderson's technology team, says the recovery will be more visible by 2002 but will be dependant on PC and mobile phone sales, which account for about 70% of the semiconductor market. Demand for semiconductor-based commodities slumped this year, following massive overproduction during 2000, particularly of mobile phone handsets. However, Greenhalgh says replacement demand should be apparent by 2002. He says: 'During the 1990s, the market in semiconductors grew by about 18% a year. Replacement demand may amount to about 5%. I don't think people will feel the necessity to replace phones and PCs as often as the industry hopes.'
The launch of the new Windows operating system, XP, in October should also provide a kick-start for the recovery. But Greenhalgh believes that the kind of growth seen in the boom years of the late 1990s will only be seen again with the development of a new 'killer' application.
There are also top-down factors that he believes point to a turnaround in the market. The OECD's leading indicators show that the bottom of the global economic trough is close. Historically, this correlates closely with higher pricing levels in the semiconductor market.
'The time to buy semiconductors is when the price starts to pick up,' he says. 'Semiconductor sales revenues are sensitive to the global economic picture and tend to turn around when the global economy does.'
Grant Cowley, US equity fund manager at Schroders, agrees that a recovery could be on the cards later this year, although he admits there are precious few signs of recovery at the present, especially in light of poor second-quarter numbers in June.
'Many people expected the turnaround to have started by now, but the poor second quarter figures have pushed recovery out to the fourth quarter,' he says.
Problems in the sector were caused by the huge capital inflows into technology in 1999 and 2000, which led to massive overcapacity, says Cowley. Supply outstripped demand and cellphone handset makers have spent the past year working down their inventories. For many, the intervening period has seen their businesses collapse.
Cowley is confident that the recovery will come, the only question being the exact timing. He says any sign of improvement in demand will lead to an increase of semiconductor sales. Anticipating the recovery, Schroders has opted to position itself early to catch the bounce. 'At the moment we are overweight semiconductors as we would rather be early than late, and the strategy appears to be working well,' says Cowley.
The Philadelphia semiconductor index (SOX) bottomed out on 4 April at 454, after the high of 1,362 in the spring of 2000. It is currently about 628.
But Greenhalgh believes Asia will benefit most from the turnaround, with recovery in the semiconductor market spearheading a change in fortunes for Asian stock markets.
• The SOX index has bottomed.
• Inventories have been worked down.
• Recovery expected in the fourth quarter.
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