In the past bull market, the semiconductor sector experienced an unprecedented rise, increasing by fourfold and basking in tremendous glory. However, since August 2021, this sector has been on a downward trajectory with no signs of recovery in sight. This brings us to a pertinent question: what is causing this decline in what is often deemed the backbone of modern technology?
To dive deeper, we need to understand the current market dynamics. The recent rally witnessed in the semiconductor sector has underwhelmed many analysts. It’s critical to assess if the market can regain its former strength after the recent trillion-yuan stimulus, or if the trajectory remains downhill.
The semiconductor industry, since August 2021, has been in a downward cycle. This is not solely due to the weakening stock market; rather, the core reason lies within the fundamentals of the industry itself. During the onset of the COVID-19 pandemic in early 2020, semiconductor production across the globe halted leading to an imbalanced supply-demand dynamic. China, however, adeptly managed the pandemic and swiftly restored its production capabilities, filling the international capacity gap and reviving sector confidence at an astounding rate.
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As the pandemic progressed, external markets began stabilizing, leading to increased demand. Nonetheless, the slow release of production capacity exacerbated the supply-demand conflict, causing prices to soar enormously—sometimes by multiples of ten or even thirty. This spike led to significant industry profits, further fueling a bullish sentiment as domestic replacements and overall sector vigor intertwined to push the value of semiconductors upward dramatically.
In an attempt to manage the soaring demand, many companies drastically increased their inventory. However, as international capacities returned to normal, the market faced a momentary oversupply, causing prices to plummet and initiating a transition to a bearish cycle for the industry. Since March of this year, amid aggressive interest rate hikes from the Federal Reserve, the global economy has entered a phase of monetary tightening, which has curtailed economic activities and diminished market demand. Consequently, the semiconductor sector is now grappling with a trifecta of challenges: destocking, a decrease in demand, and falling prices.
Understanding these basic fundamentals offers clarity on why the semiconductor sector has had such a muted presence over the past year. Yet, while the present trend appears dire, it is essential to acknowledge the potential that lies in the future of semiconductors. Technology acts as a vital engine for societal progress, and the potential for advancements within this sphere is truly vast.
Over the past two decades, technological progress has outpaced centuries of development, with significant outcomes that have reshaped modern production and lifestyles. The semiconductor industry has been at the heart of this transformative era; it is not an exaggeration to say that this sector is foundational for today’s technological landscape. Without semiconductors, planes cannot fly, cars cannot drive, missiles cannot launch, and ships cannot navigate; virtually every aspect of modern production, including military communication and medical diagnostics, relies on the functionality of semiconductors. Should this segment falter, it could plunge society back several decades.
Despite the vast marketplace and the immense demand for semiconductors, China's self-sufficiency rate currently lingers at a mere 15%. This highlights the dependency on international imports, especially for high-end chips. Should the self-sufficiency ratio rise to 75%, it would mark a fourfold enhancement compared to current levels, revealing untapped growth prospects for the Chinese semiconductor industry which remains far from hitting a ceiling.
Moreover, innovations in technology and the expansion of application scenarios continue to carve out new avenues for growth in the semiconductor realm, fueled by the urgency of domestic replacement initiatives that underscore the sector’s promising potential.
However, while the semiconductor industry harbors vast potential, investment strategies must be cautiously crafted, incorporating a mindset that is pragmatic and sensitive to current market conditions. Although the prospects gleam brightly, the sector is still entrenched in a destocking cycle, and the industry has yet to see a definitive uptick in profits—the vital turning point seems distant.
Currently, industry valuations do not indicate a deep undervaluation. Recent rebounds illustrated a temporary respite, but the situation suggests that a downward correction is on the horizon. For sustainable outperformance in the future, the market should witness either an actual profit turnaround or policy boons that exceed expectations, thereby igniting speculative fervor among investors.
At present, the industry profitability turning point is unlikely to shift back towards fortune before the first quarter of next year, and waiting for that turnaround is less feasible at the moment. The domestic substitution narrative has become somewhat overplayed; the efficacy of regular positive policy gestures appears limited in stimulating the market given the overarching conditions.
Evaluating the current valuations and the industry landscape, a cautious approach is advisable; substantial long-term investments carry certain risks beneath the veil of uncertainty. Instead, a strategy focused on dollar-cost averaging or interim trading decisions may yield more favorable results.
Looking at mid-term performance outlooks, present valuations are at a median status and do not suggest deep undervaluation. In the foreseeable future, a challenge to the lower support lines cannot be negated. This short-term situation is currently boxed in, facing pressure but may also be poised for slight recoveries with continued fluctuations. Nevertheless, expecting a massive bull market rally remains overly optimistic for now.
The aforementioned viewpoints signify individual perspectives and thought processes relative to investment decisions, and are not intended to serve as direct investment guidance. Caution and careful evaluation remain paramount as the semiconductor sector navigates its complex terrain.
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