Semiconductors: What to know before you invest

Insights from Morgan Stanley Wealth Management


Summary: Semiconductors are a $400 billion industry with demand booming as everyday objects become more high tech. Morgan Stanley Wealth Management highlights what investors should consider in this high-growth industry.

Semiconductors—often referred to as microchips—are essential components in many industries. They are considered the “brain" of modern electronics.

Compact and power-efficient, semiconductors enable advances in communications, health care, military systems, clean energy, and countless other applications. Some of the products these chips are used in include computers, tablets, and cars. Computers, the largest end market, and wireless communication make up more than 60% of the total demand for semiconductors.

Chart - semiconductor demand by end market in 2020

Source: Bloomberg as of December 31, 2020, Morgan Stanley Wealth Management Global Investment Office

Sizing up the semiconductor industry

The global semiconductor industry is expected to hit $552 billion in revenue by mid-decade, according to Morgan Stanley Wealth Management.

While the industry is ripe for growth, certain pockets of the industry are poised to expand even faster.  From 2009 through 2020, automotive industry chip demand grew 145%, wireless telecom chip demand grew 209%, and industrial and military/aerospace chip demand more than doubled.

Over the next five years, automotive chip demand is expected to grow the fastest, followed by industrial and consumer chip demand.  

Breaking down the semiconductor shortage

As a result of the pandemic, there has been an unprecedented shortage of semiconductors that resulted in production delays across several industries.

In the automobile industry, carmakers halted production of new vehicles for two months because of pandemic-related lockdowns. This resulted in automakers, who do not usually stockpile parts, losing their place in line for semiconductors.

The stay-at-home environment also affected demand for semiconductors in the consumer products industry. More people working and learning remotely were buying more personal computers and tablets. In addition, consumers who could not spend money on experiences like dining out or going on vacation spent their money instead on electronics like televisions, video games, and smart phones.

Even amid growing demand for semiconductors, Morgan Stanley Wealth Management expects the current shortage will be alleviated by the end of 2021, with firms expected to manufacture enough chips to break the logjam by the end of the year.

What investors should consider

Semiconductor firms are quite different based on their products, which range from high-end to low-cost chips all designed for different purposes. Firms typically have one of three business models—design and manufacturing, design-only, or manufacturing-only—that allow them to compete with each other, but also work together.

For broad industry exposure, consider choices in exchange-traded funds (ETFs) focused on semiconductor companies. Exchange-traded funds are baskets of securities similar to mutual funds but trade like stocks on an exchange. They can offer investors more diversity than investing in an individual company. That said, do your homework before investing in any one ETF. Pay attention to expense ratios and the underlying holdings. As an example: Some ETFs may be globally focused while others may just invest in US companies.

Investors who want to incorporate semiconductor investments into their overall portfolio may consider a Core/Satellite approach. This is when the core of an investor’s portfolio is diversified and mapped towards their goals and risk tolerance while the satellite is weighted on specific asset classes or themes (i.e., semiconductors). This type of portfolio construction helps seek returns through the satellite while the core creates ballast.

Bottom line: Semiconductors are a high-growth industry facing increasing demand, and they can offer investors several opportunities. As everyday objects become high-tech and the world becomes more interconnected, expect semiconductors to remain an important industry in the years ahead.

The source of this Morgan Stanley Wealth Management article, Semiconductor Outlook: Putting Our Chips on the Table, was originally published on March 10, 2021. 

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