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US: Going overweight on tech
The Vermilion team remain bullish on the S&P 500 (SPX), Nasdaq 100 (QQQ), and Russell 2000 (IWM). Market dynamics continue to improve ever since the major bullish false breakdowns at 6480-6520 on the SPX, 24,000 on Nasdaq futures (NQ), and $245 on the IWM, with all of them now breaking out to all-time highs and holding above bullish gaps from April 17. Everything that the team sees suggests bulls remain firmly in control, so the team want to be buying any pullbacks for the foreseeable future to the 20-day MA or 21-day EMA. The team discussed adding exposure to growth, and primarily technology, as growth has taken over as leadership relative to value. RS on the cap-weighted XLK is now breaking above its 2025 highs and they are upgrading Technology to overweight. The team have remained overweight semiconductors (SMH, NVIDIA Corp, Taiwan Semiconductor Manufacturing Co Ltd, Ciena Corp, etc.) and memory (SanDisk Corp, Western Digital Corp, Seagate Technology Holdings PLC, Micron Technology Inc) ever since last June, and these remain their favourite areas within Tech.
Technology
Richard Windsor argues SoftBank’s $2bn investment in INTC, alongside a potential 10% US government stake, may keep the company alive but does little to resolve its strategic paralysis. INTC faces a stark choice: either invest heavily to catch up with TSMC or break up the business - yet under new CEO Mr. Tan, neither path is clear. The board abandoned Pat Gelsinger’s catch-up strategy due to mounting costs, leaving INTC exposed to further share losses in PCs (to AMD and Qualcomm) and in data centres (to Nvidia and AMD). Richard warns that without decisive strategy, customer confidence will erode, competitors will gain share with ease and capital injections alone cannot avert decline. He sees no attractive entry point in INTC shares.
Pressure is making life very hard for Chinese semiconductors
Technology
While SMIC blamed domestic competition for continued gross margin weakness, Richard Windsor suspects the real issue is to be found at the “leading edge” where it is using a multi-patterning technique to manufacture at 7nm and 5nm. Both Intel and TSMC tried to do multi-patterning for 7nm and abandoned it because the yields were so low that it was not economical to continue. China’s semiconductor industry can make products at much higher cost, but the state will need to support the industry which is becoming increasingly difficult as China’s economy limps along. Furthermore, Chinese technology will no longer be the cheaper option making Western products and standards more competitive in African, South East Asian and Latin American markets.
TSMC’s massive $40bn+ capex plans has all the hallmarks of peak cycle
Robert Windsor believes history will repeat itself and that there will be a sharp downturn as new capacity comes online and demand moderates at the same time. The industry has a fundamental mismatch between supply which is lumpy (fabs) and demand which is smooth, and so, while the causes of every semiconductor cycle are different each time, the result is always the same. The sector has performed extremely well over the last 18 months, but some valuations look pretty stretched and the looming downturn threatens to unwind a lot of the gains.
Technology
Unless there is fall-off in end demand, shortages of IC from lagging nodes can be expected to be with us for up to 3-4 quarters, which seems quite disconcerting. End demand may in fact be already falling off in TVs, PCs and perhaps even smartphones in some geos. If so, IC shortages could ease up even before the addition of wafer capacity. The bad news – falling end demand drives down TSM’s Cy22 revenue. PT NT$600 (5% upside)
