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*This performance is only observed with historical backtests and not traded by the company
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Risks & Assumptions
Major end users of semiconductor industry are facing a dicult time in handling the current crisis facing the industry. Carmakers have slashed their production; PlayStations are getting harder to find in stores & even the core internet broadband providers are facing long delays for internet routers. The main component required in these sectors is often referred to as integrated circuits which is the tiniest part mounted on any motherboard or chip board. Some of the major reasons for the current industry crisis include – abnormal chip demand on back of WFH theme boom, stockpiling by major PC makers from as early as 2020 start even before the pandemic started & draught suered by Taiwan causing water shortage at its key processing plants.
Just this year alone, the shortage is expected to wipe out $ 61 billion from the carmakers sales with major chip makers including Samsung & TSMC warning about serious imbalances in the system.
How long will the current semiconductor shortage last?
An industry report by Gartner expects the current industry crisis to last till at least mid of next year i.e., June 2022. This is based on active stockpiling by major Chinese 5G smartphone maker Huawei as well as huge backlog of requirements from other industries including wireless device makers, aerospace, military, automotive, etc. Some of these industries operate in Just in Time environment like the automobile sector. Consequently, the overall lead time is expected to normalize over the course of next year.
How does the long Netherlands semiconductor stocks v/s short AEX – 25 index fit into this picture?
As seen from the chart, Netherlands -25 index was largely rangebound between Oct’2016 to April’2020 period post which the index fell on account of pandemic related downfall.
Macro View on ASML Holdings, BE Semiconductor Industries & ASM International
ASML Holding is in the Semiconductor Equipment Wafer Fabrication Industry with the company reporting EPS growth of 40.6% last year. The current year EPS estimate are topping above 56% range. The stock has become one of the top investor plays for riding the current semiconductor shortage wave. Key customers such as Intel and Taiwan Semiconductor Manufacturing are boosting capacity, fueling demand for ASML's gear. ASML has scored double-digit sales and profit growth the past four quarters. The Dutch company easily beat views with Q1 earnings that soared 264% on account of 90% jump in sales. The steeper than expected recovery in demand for semiconductors, amplified by the Covid-induced lower investments of the industry in 2020, has created significant upside to the semiconductor demand shortage.
BE Semiconductor announced last month of its plans to boost its operations in USA & Taiwan as majority of its top customers look to ramp up investments for further inventory buildup in this sector. Similarly, Q 1 earnings for ASM International showed strong growth outlook for the year ahead with increases seen in growth as well as the gross profit margin estimates. The company’s normalized net earnings for Q1-2021 was Euros 125 million, 43 million Euros higher than previous Q4-2020 estimates.
Historical Performance of AEX Index, ASML Holdings, BE Semiconductor Industries & ASM International
Historical Annual Returns
|AEX Index||ASML Holdings||BE Semiconductor Industries||ASM International|
|Current Weightage in the Index as per the market cap basis||21.21%||0.50%||1.20%|
|Cumulative Yearly Returns||56%||248%||323%||318%|
|Average Yearly Returns||10%||46%||60%||59%|
Historical Performance from 01/01/2020 to 02/06/2021
|AEX Index||ASML Holdings||BE Semiconductor Industries||ASM International||Average of 3 Stocks|
|Cumulative Daily returns||1.63%||17.19%||6.68%||24.04%|
|Historical Average Return/Trade||0.0044%||0.0464%||0.0180%||0.0650%|
|Absolute Price Returns from 01/01/2020 to 02/06/2021 ( Holding Long positions over this period)||18.24%||109.47%||160.44%||103.51%||124.47%|
For example, the strategy would involve going long on the 3 semiconductor stocks with combined investment exposure of € 100K while at the same time going short on AEX – 25 index with € 100K exposure. Accordingly, the investment amount allocated to each stock would be € 33,333K.
Based on the below observed historical performance, the pair would have probably given Net P & L of € 106,233.33 since January’2020 start till date i.e., 106.23% return.
Historical P & L Performance on Pair : Long ASML,BE Semiconductor & ASM International v/s Short AEX Index
|Investment Exposure||Per Stock||€ 33.33K|
|Long 3 Stocks P & L||Short AEX Index P & L||Net Pair P & L|
|€ 124,473.33||€ (18,240.00)||€ 106,233.33|
Risks and Assumptions for Back-tested trading strategies
Data Source: Bloomberg
Data & Prices as of: 02/06/2021 (European Market Close)
Arun Leslie John
Chief Market Analyst