New US regulations, which came into force on 7 October, will make it tougher for global semiconductor suppliers and semi equipment manufacturers to sell advanced products into China. The damage from this may already be reflected in the valuation of the largest stock in emerging markets, TSMC.
Global semiconductors split
The US Department of Commerce’s Bureau of Industry and Security semiconductor-related export control is the latest instance of the:
De-coupling of the US and China;
Use of trade and financial weapons in the US foreign policy arsenal; and
Splintering of the global technology sector.
For global investors, the repercussions of all of these trends are generally negative – less global coordination and leadership, slower global growth, and more costly innovation.
Particular problem for EM equities
For emerging market equity investors, the negative impact is particularly painful because of the size of the semiconductor and related Tech hardware sector, and, in turn, their Chinese customer base, in the investable universe.
TSMC is the leading outsourced semiconductor supplier globally and is the largest company in the MSCI EM index, with a 5.4% index weight.
Advanced products, 7nm and 5nm chips, accounted for 54% of global TSMC revenues in Q3 22 and have tripled in absolute value since the start of 2020. They represent the next phase of growth. Older generation 16nm chips, which also may be snared by these regulations, accounted for 12%.
China accounted for 8% of TSMC revenues in Q3 22 and have averaged 11% over the past year and 15% over the past five years.
Samsung Electronics is 3.3% of the MSCI EM index and Taiwan and Korea, with both dominated by Tech hardware, are, respectively, 13.3% and 11.1%.
EM investor silver linings
There are two silver linings for EM investors:
The valuation of TSMC is already cheap versus its historical average: forward PE is at a 40% discount to the five-year median. Global growth concerns, US-China friction and anticipation of these regulatory restrictions have already taken their toll; and
The beneficiaries of US-China de-coupling are alternative low-cost manufacturing locations in countries that are geopolitically aligned with and enjoy low tariff access to the US, ie Mexico and Vietnam.