• While Technology has ranked as both the strongest performing sector globally and regionally over the past 21 weeks, the 10 most traded Singapore-listed Technology stocks have averaged a 6% YTD decline in total return on S$63 million of net institutional outflow, with the majority of the 10 stocks priced at a discount to their 5-year P/B.
   
• Last week, UMS and AEM averaged 8.5% symmetrical returns on combined net institutional flow of S$10 million. This coincided with Nvidia and TSMC gaining 25% and 7% respectively. While Nvidia reported 19% QoQ revenue growth on 24 May, its projection for accelerated computing and generative AI took much of the spotlight. The following session saw SGX FTSE Taiwan Index Futures attain a 14-month trading volume record.
   
• AEM also recently maintained that looking beyond 2023, the future of the semiconductor industry has never been more promising stating that “recent excitement over Generative AI, such as ChatGPT, is fueling the demand for AI-focused semiconductor devices to enable these solutions to be delivered to the masses at economically feasible rates”.
   
• UMS also recently relayed the Semiconductor Industry Association’s evaluation that despite the current short-term cyclical downturn, the long-term outlook for the semiconductor market remains strong due to the ever-increasing role of chips in powering the critical technologies of today and tomorrow.

Semiconductor Megatrends

The Technology Sector comprises 22% of the FTSE All-World Index and 55% of the FTSE Taiwan RIC Capped Index, and has been a key driver of the Indices respective YTD SGD price gains of 9% and 17%.  During this time, the Semiconductor Industry has contended with an inventory correction that began in 2H22, while persistent inflation and decelerating growth have reduced consumer electronics demand.

Recently, semiconductor companies have been increasingly contrasting the 2023 overcapacity and chip glut with the potential demand for semiconductors and semiconductor services spurred by Artificial Intelligence (“AI”) applications in 2024 and 2025. Deloitte maintain that Generative AI has “diverse applications across all industries, ranging from market research and note-taking, to enhancing customer support interactions” and that “specific use cases have been identified in various sectors, such as personalised financial planning for wealth management, medical diagnosis in healthcare, creating immersive worlds and experiences in media and entertainment, and outfit curation for retailers”.

Gartner noted in April that the “memory industry is dealing with overcapacity and excess inventory, which will continue to put significant pressure on average selling prices in 2023” with “the memory market projected to total $92.3 billion, a decline of 35.5% in 2023, however, it is on pace to rebound in 2024 with a 70% increase”.

As of 28 April, Nvidia was the fourth largest weight of the FTSE All-World Index and Taiwan Semiconductor Manufacturing Company (“TSMC”) was the largest weight of the FTSE Taiwan RIC Capped Index.

• On 24 May, the founder and CEO of NVIDIA highlighted that “the computer industry is going through two simultaneous transitions, accelerated computing and generative AI adding that “a trillion dollars of installed global data center infrastructure will transition from general purpose to accelerated computing as companies race to apply generative AI into every product, service and business process”.
   
• TSMC highlighted in March that current industry megatrends include 5G, AI proliferation, and the accelerating digital transformation. The recent AI spotlight has also seen the SGX FTSE Taiwan Index Futures open interest soar to a two-year record, while 25 May saw the Futures contract generate 14-month high in daily volume. On a side note, increased liquidity of the SGX FTSE Taiwan Index Futures has seen its top of the book trading size (highest bid/lowest offer) nearly doubled YoY in 2023, with the average bid-offer spread tightening further to 2.0 bps.

UMS & AEM Average 8.5% Gains on the Week

The 10 most traded stocks of Singapore’s Technology Sector are tabled below.

 Source: SGX, Refinitiv (Data as of 26 May)

UMS Holdings and AEM Holdings generated comparatively symmetrical returns of 8.6% and 8.4% last week, with respective net institutional inflow of S$4.3 million and S$5.6 million.

• AEM Holdings highlighted on 11 May that looking beyond 2023, the future of the semiconductor industry has never been more promising stating that “recent excitement over Generative AI, such as ChatGPT, is fueling the demand for AI-focused semiconductor devices to enable these solutions to be delivered to the masses at economically feasible rates”. AEM Holdings also noted that its inventory levels are reducing, and inventory corrections are expected to conclude in late 2023, early 2024. The company reported 1QFY23 revenue of S$152.7 million, maintaining target guidance of S$500 million for FY23, following record FY22 revenue of S$870.5 million.
   
• UMS Holdings relayed predictions from Industry Association SEMI on 10 May that global fab equipment spending for front-end facilities is expected to decrease 22% YoY to US$76 billion in 2023 (from a record high of US$98 billion in 2022) before rising 21% YoY to US$92 billion in 2024. In addition, the company reiterated the Semiconductor Industry Association’s acknowledgement that despite the current short-term cyclical downturn, long-term outlook for the semiconductor market remains strong due to the ever-increasing role of chips in powering the critical technologies of today and tomorrow. The company reported Group revenue for 1QFY23 remained relatively stable, easing 5% YoY to S$80.8 million.

As noted in the table above, the 10 most traded stocks of the Singapore-listed Technology Sector maintain a combined market capitalisation of close to S$10 billion, while averaging close to S$40 million in average daily turnover. The 10 stocks have averaged a 6.0% decline in total return over the past 21 weeks on S$62.6 million of net institutional outflow. Meanwhile, the Lion-OCBC Securities Hang Seng TECH ETF has been the most traded Exchange Traded Fund in Singapore so far this year.

The longer term 5-year total returns and average valuations of the 10 most traded stocks of the Singapore-listed Technology Sector are tabled below.

Note Total Returns for companies listed within the 5 year period, are taken from debut date.  

Source: SGX, Refinitiv (Data as of 26 May).

Ongoing Growth & Geoeconomic Fragmentation Risks

With Singapore’s 1Q23 GDP report last week, the MTI cautioned the electronics downcycle is likely to be deeper and more prolonged than earlier projected. The downturn in the electronics cycle has seen Singapore NODX, Taiwan and South Korea exports print YoY contractions since October 2022.

The IMF also noted in its first staff discussion note for 2023 that rising geopolitical tensions have led to more protectionism and increasing use of cross-border restrictions on the national security grounds. For instance the US National Strategy (October 2022) which setting a goal to “maintain as large a lead as possible” in selected technologies such as computing, biotech, and clean tech with China-related measures announced on October 7, 2022, seeking to restrict China’s access to these technologies, with a focus on technologies that could be used in the military sector. The IMF maintain that this has seen companies increasingly focus on the resilience of their supply chains, with production location decisions by firms may be guided by government policies rather than efficiency considerations.

Gartner have noted that COVID-19 and the US and China trade tensions have precipitated the deglobalisation trend and the rise of techno nationalism noting that “semiconductors today are seen as a national security issue” and that “governments around the world are scrambling to build self-sufficiency in the semiconductor and electronics supply chain, which is leading the incentivization of onshoring initiatives across the world”.