Political and Technological Turmoil

WEEKLY UPDATE

Wild fluctuations

The past week, in our view, takes the prize as the wildest week of the year. The action we did not get from the European Central Bank at their rate meeting on Thursday, we instead got from the political scene. The week included, among other things, an assassination attempt on Donald Trump, a global IT outage at Microsoft, headwinds for semiconductors and Big Tech, but tailwinds for less aggressively priced stocks in consumer staples, banks, and especially small and midcaps.

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Trump pulls ahead

Last Sunday, we witnessed an assassination attempt on Donald Trump, where a slight head movement (or God, if you ask Trump himself) saved Trump's life. Paradoxically, this, combined with growing skepticism about Biden's candidacy, could end up meaning that he becomes president again. At least the odds with bookmakers rose from the mid-50s to 65% right after the attack, as shown in the graph below. This interesting development eventually led to Biden pulling out of the race Sunday, as Vice President Kamala Harris overtook as the most favored democratic candidate.

Trump pulling ahead has had a significant impact on stock development during the week, with most major tech bosses from, for example, Google, Microsoft, Amazon, and Tesla issuing press releases expressing sympathy after the assassination attempt. Besides good ethics and morals, this is also a good tactical move when dealing with Donald Trump, as it can be very beneficial to stay on good terms with him.

Major rotation continued

Trump's policy of putting America first typically benefits the smaller American companies that primarily earn their revenue domestically. Along with a general belief in a soft landing in the US due to good inflation figures last week, this could be one of the explanations for the significant rises we have seen in the small and midcap segments over the past 10 days, with the Russell 2000 up by nearly 10%.

Meltdown in semiconductors

Even the semiconductor sector was affected by American politics, experiencing an actual meltdown on Wednesday. Here, SOXX (a semiconductor ETF with 30 stocks) fell by over 8% from the opening on Wednesday to closing on Friday. This is significant. Mid-week, Trump came out with sharp rhetoric on one of the few areas where Trump and Biden agree. They both believe that the trade restrictions against China are not strict enough, as China continues to bolster its chip production capabilities.

Earnings reports from ASML and TSMC

The Chinese ramp in chip production capability was clearly seen in ASML's earnings figures, with half of their sales coming from China. If the US bans the sale of anything containing American technology (IP) to China, as they have threatened, it could potentially mean a halving of ASML's revenue. Similar figures can be found across the entire semi cap segment (the companies that produce equipment for chip production).

For TSMC, the threats are more tangible, with China's saber-rattling towards Taiwan still looming. Additionally, the support the US provides to the domestic chip industry will mean tougher competition. We do not believe the Chinese will deploy tanks for an invasion of Taiwan, and we still see a huge demand for the chips TSMC produces. So, although we have sold our positions after significant rises, the fall may become too great for us to stay out.

Global IT outage

On Friday, computer systems around the world experienced failures after a botched update from the cybersecurity company Crowdstrike, which caused outages in parts of Microsoft's systems. The outage affected businesses from airlines to banks and TV stations, and subsequently spread to the stock market in general, particularly impacting Crowdstrike, which fell 11% on the day.

The reason for the stock market impact was that it became apparent to participants how little it actually takes to bring the whole system to a halt. When the system halts, it costs a lot of money, as does securing against future outages and having the right backup systems. Ironically, this supports the investment case for stocks like Crowdstrike, which thrives on solving the very problem they were hit by. In NDI-FutureTech, we do not have a position in Crowdstrike because of the very unattractive valuation that it has been trading at. At high valuations the stocks are very vulnerable in something bad occurs.

NDI-FUTURETECH

Rally makes for buying opportunities

NDI-FutureTech had a rough week, and is just like NASDAQ, down apx. 3%. In total, NDI-FutureTech is up 12.51% this year and 24% since inception the 1st of December.

The week started with a strong rally in small and midcap tech, while the declines on Wednesday and Thursday in the index-heavy tech companies also dampened the celebrations in small-cap tech. NDI-FutureTech is broadly invested in tech, so the late-week decline also affected our portfolio.

How deep will the correction be?

The easy question to answer is whether the demand for AI hardware will fall. The answer is quite the opposite. AI is already creating significant value, and we are only at the beginning of a many-year race to secure a dominant position on the next technological mega-platform, AI. The players in this race, such as NVIDIA, Microsoft, Amazon, Google, Elon Musk, Meta, and many others, have nearly unlimited resources and a full understanding of the huge potential (this is historically unique). Therefore, we at NewDeal Invest see increasing demand for AI and AI infrastructure going forward. Long-term, there is nothing fundamentally wrong with the investment case.

The stock market, however, swings like a pendulum, and when the pendulum has swung far in one direction, the risk of movement in the opposite direction increases day by day. This movement has started now, and therefore we are experiencing a period of weakness in the semiconductor segment of the market. It may be over now, but it could also last for months. This means that during this period, there will be more sellers than buyers, and we will see falling prices. Neutral news will be interpreted negatively, and negative news will be overinterpreted. Our assessment is that the semiconductor segment will remain expensive to very expensive because it is easy to foresee long-term growth.

A small semi cap company, AEHR Test Systems, reported earnings this week, and the numbers were not impressive, as they primarily supply test equipment to silicon carbide chip manufacturers (used in electric cars). AEHR now explains that their technology will become relevant for many other chip segments, including memory, logic, and GaN segments.

THE COMING WEEK

Big Tech week

Next week continues to be characterized by a summer holiday mood in terms of economic data from the major economies. On Friday, the PCE Price Index in the US will be published, which will contribute to the overall picture of inflation, but otherwise, it will be a quiet week.

In stark contrast to the summer holiday for key figures, earnings reports will ramp up with a big day on Tuesday, July 23, when we get results from, among others, Google (Alphabet), Tesla, Microsoft, and Visa.

We are also following the reports from Snap, Spotify, Cadence, SK Hynix, and KLA Corporation.

We are mostly anticipating the reports from Texas Instruments (Tuesday), Silicon Labs, Tower Semiconductor, STMicro, as these companies have been in a cyclical downturn and may be close to the bottom.