Chip Market Crash: 4 Factors & Future Adjustments?
The semiconductor sector has recently experienced a drastic decline, dropping nearly 7% in a single day, triggering widespread concern among investors and industry experts alike. Such a sharp downturn in one of the most crucial technological arenas warrants an in-depth examination of the underlying causes, the current challenges facing the sector, and what this might signify for the future of semiconductor and chip manufacturers.
Several critical factors have converged to precipitate this significant drop. Firstly, the industry is now clearly entering a downturn phase, which has been exacerbated by a looming global economic recession. Key players such as Qualcomm, MediaTek, and Intel have reported disappointing expectations, anticipating a reduction in global smartphone shipments, potentially ranging between 5% and 11%. Furthermore, forecasts indicate that the PC market could shrink by about 10% overall in 2022, with AMD projecting a staggering 40% decline in its PC processor business year-on-year. The situation is mirrored in the Chinese market, where sales continue to decline compared to previous years.
Since 2022, there has been a rapid expansion in semiconductor and chip production capacities, leading to excess supply in the market. This surplus has resulted in a significant buildup of inventory, with mobile supply chain manufacturers reporting the highest levels of stock in five years. As a result, the industry has started to phase into a period of destocking, leading to further price declines.
The collapse of prices in the semiconductor and chip industry has been nothing short of dramatic this year. What was once a scenario characterized by frantic buying has shifted to aggressive discounting, with some products experiencing a price drop of over 80%. Such a drastic fall has left many investors, especially speculators active in markets like Huaqiangbei, facing heavy losses.
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Secondly, a continuous stream of negative news has had a substantial impact on market confidence. On October 7, the U.S. Department of Commerce implemented heightened restrictions on the export of semiconductors and related manufacturing equipment to China, citing national security concerns. These restrictions particularly target advanced computing chips and specific semiconductor manufacturing equipment, with 31 Chinese entities being placed on an unverified list, further tightening the grip on trade relations.
The global semiconductor and chip sector has been undergoing significant adjustments throughout the year. This was especially apparent on the last day of the National Day holiday in China, when semiconductor shares in the American markets plummeted, severely denting investor sentiment within China’s A-share technology sector. The day's trading saw semiconductor stocks open significantly lower and continue to slide throughout the session, manifesting the broader market's pessimism.
A third reason contributing to this downturn is the fact that valuations have not yet reached their lowest point. The semiconductor sector exploded during the previous market cycle, soaring by 400%, with price-to-book ratios inflated from a record low of 1.91 in 2018 to an astonishing 8.3. Currently, however, it has fallen back to a ratio of 4.11, hovering just below the midway point of its previous heights. Thus, this recent decline is not solely due to irrational market reactions but reflects a necessary correction in valuations, where fundamental pressures and negative news have intensified the sell-off.
Moreover, the semiconductor market is also grappling with the overarching trends affecting global equity markets. With numerous markets currently undergoing adjustments, major indices, including China’s A-shares, are experiencing significant declines, leading to a pervasive atmosphere of market negativity. This downtrend indisputably influences the semiconductor sector, pushing it further into a medium-term adjustment phase.
Looking ahead, the future of the semiconductor sector depends heavily on three primary factors. Firstly, there needs to be a turning point in the industry’s cycle. The current phase of destocking is projected to last at least until the first quarter of next year. Given the persistence of the U.S. monetary tightening—particularly increases in interest rates—the global economy is not anticipated to emerge from recession until at least the middle of next year. This prolonged period of monetary tightness means it will be challenging to see any improvements in market demand without a significant pivot in global monetary policies, particularly if the U.S. decides to halt further rate hikes.
Secondly, there is a pressing need for clarity regarding when the bear market will come to an end. The influence of macroeconomic trends cannot be overstated, and in a continually bearish environment, sectors often struggle to demonstrate strength independently, especially those already facing fundamental declines. Without unexpected positive news, these sectors typically follow the broader market downwards. Historical trends suggest that the timing of the end of this bear market may align with the second half of next year; a review of A-share fluctuations over the past 30 years indicates a pattern where adjustments generally follow a similar timeline.
Finally, the structural support seen in technical market trends plays a critical role. Currently, key support levels are under scrutiny; the upper yellow line on the weekly charts has been breached, and the next crucial support lies at the red line in the middle. A failure to maintain this level could result in a further descent to the blue line below. This analysis pertains to long-term market rhythms rather than short-term speculation. Given the accelerated descent of sector indices in October, a strong rebound is anticipated. It's essential to recognize, however, that the market has yet to hit a valuation bottom. Even if a rebound occurs, it isn't advisable to engage in heavy accumulation expecting the onset of a new bull market, as risks remain that prices could decline to new lows after temporary upticks.
As the situation unfolds, investors should adopt a cautious approach. Engaging in light positions during short-term rebound episodes could be a strategy, yet immediate exit after any temporary gains might be prudent. Until the market finds a definitive bottom, it is overly optimistic to consider any rebounds as signals for the beginning of a new bull market. The semiconductor industry's current landscape poses significant challenges, but understanding these market dynamics is vital for charting a course through the turbulence ahead.
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