Q. Things appear to be looking up for the Asian tech sector versus six months ago?
In the first half of 2023, we detected signs of a potential bottoming of the semiconductor cycle with green shoots of recovery in some segments like memory. The industry is undergoing destocking as we speak, and we expect it to exit the year with below seasonal level of inventory.
That said, how quickly the end demand bounces back remains to be seen as customers are still cautious overall. We expect this to happen over 2024. The semiconductor industry is poised for a cyclical recovery in the short term while longer term the prospects have strengthened on the back of structural growth from generative AI, which might mean a multi-year demand of data centre content and infrastructure upgrade, boding well for the advanced semiconductor sector.
Q. You mentioned generative AI. Is there substance behind the hype?
We see generative AI as a game changer. When it comes to generative AI applications, ChatGPT is just the tip of the iceberg and demand for AI has accelerated much faster than expected, with the server and networking supply chain among the winners in this rapidly growing market.
Over the longer term, Nvidia has highlighted a big US$1 trillion opportunity in the redesign of the global data centre architecture. We see the content upgrade and architecture redesign as a multi-year process, going hand in hand with the growth of generative AI applications, with ChatGPT just among the first of many more to come.
The bottom line is that infrastructure needs to be built to support such applications.
Q. Any AI beneficiaries in our Asian holdings?
Yes, specifically our core semiconductor and tech hardware holdings in TSMC, ASML and ASMI. For instance, TSMC’s chipmaking edge with a 60% share of the global foundry market ensures that it is well placed to capitalise on the growing demand for high-end computing semiconductors, like those used in AI applications, in the long term.
The key AI chips are all built on advanced semiconductor technology, and TSMC is the global tech leader here, supported by companies, such as ASML and ASMI, which provide the equipment necessary to build the advanced semiconductor supply chain.
Q. Aside from AI, are there any other key trends?
I recently took a trip to Taiwan, the global chip hub, to catch up with our holdings as well as take a closer look at some prospects.
During the trip, one key theme kept cropping up – the China plus 1 and plus 2 strategies that companies are adopting to diversify supply chains. This means having capacity in China and investing in one or two locations elsewhere, to mitigate the impact of geopolitical tensions on the supply of their goods and services globally.
This appears to be a concrete long-term trend. End-customers, especially server and PC clients in the US, are requesting their contract manufacturers to diversify their supply chain outside China. This is not a new trend, but the key change is the pace, which is picking up fast.
Asia ex China has been a key beneficiary, with Singapore favoured for semiconductor manufacturing, Malaysia for its engineering talent by software design companies, and Thailand which is drawing interest from the printed circuit board supply chain because of its developed infrastructure and industrial parks.
Q. Given the above, what are you doing with the tech exposure across portfolios?
Through last year, we had more than halved our active weight to the technology sector in our flagship Asia Pacific ex Japan fund, as we are growing more cautious about the outlook for end-demand and sought to de-risk our technology exposure.
Coming into the first half of 2023, we built back and added to our positions in TSMC, ASML and ASMI as we detected signs of a potential bottoming of the semiconductor and technology hardware cycle, alongside green shoots of recovery in some consumer segments.
This decision has paid off. The three companies were among the top contributors to performance of our flagship Asia Pacific ex Japan fund in the first half of 2023, as sentiment rebounded, and they delivered reasonable numbers in the recent earnings season.
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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.