- The technology sector, bolstered by strong balance sheets and ample cash reserves, will remain resilient in a higher-for-longer interest rate environment. Big tech firms, leveraging AI, are poised to expand their market shares and profits across various domains.
- The semiconductor industry is undergoing a turning point, driven by adjustments in inventory cycles and an increase in government incentives, anticipating higher sales in the coming years.
- The New Asian Tigers, which are Japan, Singapore, and South Korea, stand to benefit from shifting geopolitics and domestic catalysts. The semiconductor industry rebound in 2024 will also further propel these economies as well as Taiwan and Malaysia.
- Brazil's positive economic outlook, driven by structural underinvestment in the oil & gas industry, will be supported by elevated commodities prices. The country has cut the Selic rate for the fourth time on 13 December 2023 to 11.75%.
Investors navigated uncertain investment paths throughout 2023, grappling with the Fed's aggressive interest rate hikes and surging commodity prices. As we enter the last month of this turbulent year, certain markets and sectors are showing signs of recovery. We anticipate that 2024 holds significant potential for the digital economy and semiconductor industries, driven by stronger demand factors and normalised supply chains, leading to improved revenue and margins. Here is our roundup of key sectors and markets to consider for 2024.
Digital Economy: Stronger-for-longer Big Tech Giants
We believe that the technology sector has successfully navigated a recession from 4Q22 to 1Q23, marked by massive layoffs and earning slumps. The sector is now in the recovery phase, exhibiting robust earnings in 2Q23 and 3Q23. We foresee Big Tech stocks maintaining their dominant positions and spearheading the next phase of growth in this sector. They are poised to leverage competitive advantages, gaining momentum, particularly in the realm of artificial intelligence (AI).
Big Tech firms will remain resilient in a higher-for-longer interest rate environment, thanks to their adept debt management and substantial cash reserves. Generating billions in free cash flow each quarter, these companies show minimal reliance on external borrowings for growth. Moreover, they can invest their cash reserves in high-yielding short-term debt instruments, further bolstering their financial position.
AI will propel Big Tech firms to greater heights, expanding their market shares and profits across domains like search algorithms, content generation and modifications, product recommendations, and device authentication. The dominance of Amazon, Microsoft, and Google in cloud services, holding a 66% market share, continues to thrive amid sustained demand for cloud computing. We believe that Big Tech stocks have yet to fully reflect the potential upside from megatrends such as cloud computing and AI. Positioned at the forefront, these companies are poised to capitalise on the upcoming phase of exponential growth, armed with substantial capital and a wealth of top-tier talent at their disposal.
Related article: The earnings recession is over. Big Tech is set to lead the next phase of growth.
Semiconductor: Poised For A Robust Comeback
The semiconductor industry, facing a downturn since 4Q22, is at a turning point with the rapid adoption of AI, and adjustments in the inventory cycles. We anticipate significant opportunities for chipmakers in the AI revolution, projecting a potential 40% YoY growth in quarterly semiconductor sales by 2Q25.
Global demand for semiconductors has been rising due to increased reliance on technology and a growing number of end-user products with higher silicon content. However, semiconductor supply tends to be cyclical, causing fluctuations in sales growth. The current downcycle began in 2020 with a shortage, prompting chipmakers to increase capacity, resulting in a substantial 39% and 20% rise in capital expenditure (capex) in 2021 and 2022, respectively. This surge led to a supply glut. This year, chipmakers have started to reduce capex, with industry-wide capex expected to contract by nearly 20%. While caution is exercised in the near term, chipmakers may underestimate AI's long-term impact on demand. As the downcycle eases and recovery signals strengthen, increased supply could drive higher future sales growth.
Government incentives and base effects will also contribute to sales growth globally. Initiatives like the US's USD 280 billion CHIPS and Science Act have spurred companies like Micron, Qualcomm, GlobalFoundries, and TSMC to expand manufacturing capacity. In Asia, China prioritises the development of domestic semiconductor capabilities, supported by the China Integrated Circuit Industry Investment Fund (ICF), which has raised over USD 40 billion in its initial two phases.
Related article: Chip sales to top 40% year-on-year by 2Q25. Here’s how you can capitalise on this opportunity
New Asian Tigers: Navigating the Geopolitical Shift and Semiconductor Resurgence
The evolving geopolitics in recent years have significantly altered the Asian investment landscape. Tensions between the US and China present challenges and opportunities for different Asian countries. Supported by favourable government policies and a rebound in the semiconductor industry, New Asian Tigers are emerging. We anticipate Japan, Singapore, and South Korea to become the new driving forces behind growth in Asia.
Japan
This year, the Bank of Japan (BOJ) implemented a noteworthy policy change - raising the JGB 10-year bond yield from 0.5% to 1.0% and redefining the 1% as a loose upper bound rather than a rigid cap. This marks the first major alteration to its policy framework since the implementation of yield curve control (YCC) in September 2016. We interpret this policy adjustment as a pivotal step toward a tighter monetary policy regime, which will result in a strengthening yen. Consequently, we anticipate a reduction in trade deficit and an influx of capital.
The ongoing corporate governance reforms in Japan, coupled with the country's resurgence as a semiconductor powerhouse, provide powerful tailwinds for Japanese stocks. A key initiative involves a consortium of eight major Japanese companies - Toyota, Denso, Sony, NTT, NEC, SoftBank, MUFG Bank, and Kioxia - joining forces with substantial financial backing from the Japanese government to establish the semiconductor manufacturer Rapidus. Teaming up with IBM Research, Rapidus targets pioneering two-nanometer technology by 2027, focusing on specialised chips like low-power AI chips. The collaboration is poised to create a semiconductor supply chain that is less reliant on China, enhancing Japan's appeal as a favoured location for foreign semiconductor companies’ overseas expansion such as TSMC.
Related article: The resurgence of Japan: A new era of multi-year tailwinds with upside potential of 30% by 2025
Singapore
Singapore, an original 'Asian Tiger', has strategically built substantial cash reserves, making it one of the world's wealthiest nations with enviable foreign reserves. Its robust economic fundamentals and fiscal position have resulted in a strong appreciation of the Singapore Dollar. Amid ongoing geopolitical tensions between the US and China, Singapore has reaped the rewards of heightened capital inflows and asset reallocation to the region, driven by its transparent legal regimes and stable macroeconomic conditions. We anticipate Singapore will continue on its growth trajectory and emerge as a New Asian Tiger.
Despite its size, Singapore boasts a highly skilled and productive workforce, positioning it favourably as a hub for advanced manufacturing. It specialises in IC packaging and testing and positions as a key player in the semiconductor supply chain downstream. Government support, specialised expertise, and alignment with the 'US/China plus one strategy' have fostered prominent Outsourced Semiconductor Assembly and Test (OSAT) companies like UMS Holdings (SGX: 558) and Automated Test Equipment (ATE) companies such as AEM Holdings (SGX:AWX). While these two companies showed negative year-on-year growth in 1H23, the industry indicates a faster inventory digestion pace, hinting at potential strong demand in the coming quarters. This insight suggests that Singapore's electronic product exports will drive economic growth in the years ahead.
Related article: The 5 semiconductor players in Singapore and Malaysia
South Korea
South Korea, known for its robust industrial base in electronics, automobiles, shipbuilding, and petrochemicals, has propelled itself onto the global stage with renowned brands such as Samsung, LG, and Hyundai. In a bid to bolster its economy and compete globally in technology supremacy, it initiated a USD 422 billion investment in March this year, particularly in key areas like chips and electric vehicles. Additionally, the parliament approved the 'K-Chips Act,' increasing the tax credit from 8% to 15% for large enterprises and from 16% to 25% for SMEs. With Samsung and Hynix dominating DRAM manufacturing, holding a global market share of 39.6% and 30.1% as of 2Q23, South Korea aims to maintain its leadership in semiconductor technology and surpass Taiwan in logic chip production.
Most importantly, the Biden administration's decision to lift export control restrictions on Samsung and Hynix serves as a pivotal catalyst for South Korea to maintain its leadership position in this industry. With these two companies contributing nearly 25% to the KOPSI index, we expect a significant boost to South Korea’s exports and economic growth.
Related article: The Shifting Geopolitics and The New Asian Tigers
Other Choices: Taiwan and Malaysia
In addition to the three New Asian Tigers mentioned earlier, we anticipate that the rebound in the semiconductor industry will also fuel economic growth in Taiwan and Malaysia.
The semiconductor industry, producing over 60% of the world’s semiconductors and over 90% of the most advanced ones, is often referred to as Taiwan’s silicon shield. Despite TSMC establishing a new fab in Arizona, Taiwan's fabs maintain a competitive edge in speed and precision due to efficient, high-skilled, and long-hour labour. To fortify this shield, Taiwan enacted its Chip Act, offering tax subsidies worth 25% of research costs, attracting companies like ASML, Micron, and Applied Materials to expand their productions in the country. Nevertheless, we note that Taiwan remains exposed to geopolitical risks given the ongoing tension between the US and China, despite an increase in global support for Taiwan.
Meanwhile, Malaysia is regaining investors’ confidence following the conclusion of state elections. Robust domestic consumption and an uptick in net foreign investment inflow have propelled Malaysian institutions to deploy cash back into equities, marking a turnaround after a year of muted markets. Additionally, as an active player in the downstream part of the semiconductor supply chain, Malaysia is poised to benefit from the industry's rebound. Key players like ViTrox (BURSA: 0097), Inari Amertron (BURSA: 0166), and Malaysian Pacific Industries (BURSA: 3867) anticipate a recovery in 2024. Comprising 12% of the export sector, semiconductors will also become the key driver of Malaysia’s exports in the coming years.
Related articles:
The 5 semiconductor players in Singapore and Malaysia
The Shifting Geopolitics and The New Asian Tigers
Brazil's Economic Resilience: Flourishing Amid Favourable Commodities Outlook
The Central Bank of Brazil (BCB) has initiated rate cuts ahead of its global counterparts. Brazil's core inflation currently stands at 5.55% growth in October, one of the lowest year-to-date increments. Policymakers are steadfast in their commitment to half-point rate cuts through December, bringing the country's benchmark interest rate down to 11.75% on 13 December 2023, stimulating activity and lending. The Brazilian economy is poised for a 3.1% growth this year, supported by expanded agriculture and consumption, a resilient service sector, and a stabilised political outlook.
Moreover, a positive commodities outlook has been a driving force behind Brazil's economic growth, particularly in trade revenues where commodities play a pivotal role in exports. With materials and energy comprising 21% and 18% of the Bovespa Index respectively, higher commodity prices also bolster the revenue for these major sectors, contributing to overall index earnings. Despite some recent retreat in commodities prices, our optimism persists due to (1) a tighter supply outlook resulting from OPEC+ production cuts, (2) ongoing conflicts such as the warfare between Israel and Hamas, and (3) structural underinvestment in the oil and gas industry as producers maintain capital discipline.
Related article: Brazil: Look to this attractive market to outperform again
Exercise Caution: Less Appealing Investment Options
We maintain a neutral stance on major developed markets such as the US and Europe, as overall valuations appear stretched. Investors are encouraged to explore emerging opportunities within the technology and semiconductor sectors if they still want to invest in the US. However, for Europe, the growth outlook remains weak due to sluggish economic performance compared to other developed markets, coupled with structural issues such as low productivity growth, demographic declines, and high inflation.
Our stance on Asia ex-Japan is also neutral, reflecting a cautious approach, especially regarding heavyweights like China. Meanwhile, although India is poised for robust economic growth, its valuations remain elevated compared to regional peers, and it faces challenges such as a depressed currency and corporate governance issues. Similarly, our view on Emerging Markets is neutral, with a preference for "Emerging Markets ex China."
Lastly, we maintain a bearish outlook on China and Hong Kong due to long-term structural issues, including the shift to a top-down state-controlled economy and concerns about geopolitics. China's economy continues to be hampered by the real estate sector, due to inadequate government support and weak consumer and business confidence.
Related article: This is how you can unlock the growth potential in emerging markets without China-specific risks
Figure 1: Market / Sector Ratings 2024
Figure 2: Recommended Products
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