Conclusion: The relevant growth data emanating from Asia suggests the tech sector is at risk of deteriorating operating metrics over the intermediate term.
If you’ve been following our research for the past 2-3 months, you’re likely well aware of our bearish intermediate-term outlook for the slope of Asian growth – which we typically view as a leading indicator for economic trends in the developed world, given Asia’s place in the global supply chain.
One supply chain that has had consensus a’buzzing in recent months is the tech sector (second-best S&P 500 performer YTD at +17.3%) – particularly at the consumer-facing end. While it can be strongly argued that the trend of stellar operating results out of AAPL are strong justification for its price performance, we’d be remiss to dismiss Apple’s tempered guidance in the context of the manufacturing, export, and headline growth trends coming out of what we view as they key tech-focused countries in Asia. Consider the following metrics:
- S. Korea: +2.8% YoY in 1Q12 vs. +3.3% in 4Q11; slowest rate of growth since 3Q09
- Taiwan: +0.4% YoY in 1Q12 vs. +1.9% in 4Q11; slowest rate of growth since 3Q09
- Thailand: reports 1Q12 GDP on MAY 20; likely to continue rebounding from the 2H12 flooding
- S. Korea: +0.4% YoY in MAR vs. +4.2% in JAN-FEB (combined to smooth out Lunar New Year distortions)
- Taiwan: -3.8% YoY in MAR vs. -5.7% in JAN-FEB
- Thailand: -3.7% YoY in MAR vs. -9.1% in JAN-FEB (Capacity Utilization has since rebounded; in fact, it’s at a 4yr high)
- S. Korea: -1.4% YoY in MAR vs. +5.6% in JAN-FEB
- Taiwan: -3.3% YoY in MAR vs. -4.5% in JAN-FEB
- Thailand: -6.5% YoY in MAR vs. -2.4% in JAN-FEB
Absent a marked-acceleration in production orders and developed-world consumer demand (occurrences we’d classify as “improbable”), we would expect the aforementioned sour trends in Asian growth data to negatively impact corporate operating metrics to varying degrees throughout the tech supply chain over the intermediate term. For example, AAPL, even if it has its own secular story independent of the broader technology supply chain, attributes 70% of its COGS to companies in Taiwan (50.9%) and S. Korea (19.1%) – not inconsequential in the context of heightening expectations.
The caveat is that this is but one of many read-throughs into Apple’s and other tech companies’ operating trends and we seldom make calls on a stock without a thorough analysis of all of the puts and takes in a company’s business model. Still, the data is what it is and we see risk in ignoring it – an activity (i.e. ignoring bad data) consensus tends to do repeatedly when making valuation calls near cyclical market peaks. Another caveat is the potential for sour Asian economic data to be bifurcated at the micro level (particularly U.S. vs. the Eurozone) – a trend we’ve seen highlighted recently by Chinese export figures.
All told, it is our view that this data should force tech-focused investors to, at a bare minimum, exercise caution over the intermediate term. AAPL is currently flirting with a quantitative breakdown on our immediate-term TRADE duration. Further, the quantitative setup (bearish TRADE & TREND) in both Korea’s KOSPI Index and Taiwan’s TAIEX Index are in support of our fundamental view. Thailand’s SET Index, which is bullish TRADE & TREND, continues to benefit from an idiosyncratic tailwind (flood recovery). All of these proprietary risk management levels are included in the charts below.