Current credit valuations of semiconductor chip manufacturers’ securities reflect supportive market trends. The future is unlikely to be as bright as 2021, however.
As chip shortages persist into 2022, they will continue to add to global inflationary pressures. Double-ordering and inventory hoarding are likely to contribute to significant oversupply when the cycle turns. So too will recent substantial capacity expansion efforts.
We see more value downstream in the securities of industrial OEMs, many of which have managed to successfully navigate supply shortages and rising input costs, including for labor. Moreover, supply constraints have enabled OEMs to raise prices to protect their margins, adjust their product mix to focus on their most profitable offerings, and improve their cash flow.
“Auto manufacturers and many other industrial OEMs are also in the midst of a cyclical upturn thanks to strong demand coming out of the pandemic,” said Vanguard credit analyst Andreas Nagstrup, “And we would expect production volumes to accelerate as the semiconductor shortages eventually normalize.”
This is an abridged version of research published recently by Vanguard Fixed Income Group.