Snapping our immediate-term TRADE line of support recently, the iShares MSCI Taiwan ETF (EWT) is now breaking down alongside what was one of our favorite ways to play our 2Q Macro Theme #StructuralInflation on the long side – semiconductor stocks (SMH). Recall that in our 6/3 research note titled, “BOOKING THE GAIN IN BRAZIL; ROTATING INTO TAIWAN AND BACK TO INDIA”, we preferred Taiwan over most other international equity markets at that time due to its exposure to the “anti-CapEx cycle” (i.e. M&A):
- “It’s worth noting that the Tech sector accounts for a whopping 46% of TAIEX market cap, with semiconductors alone accounting for 23%.”
- “Not surprisingly, the benchmark Taiwan TAIEX Index has registered a +0.83 correlation with the MSCI World Semiconductors GICS Level 3 Index in the YTD, which is up a bit from the +0.80 correlation registered over the trailing 3Y.”
- “Indeed, it would seem that getting the semis cycle right is really all investors need to have a handle on to get market beta right for Taiwanese equities.”
Now, we are getting increasingly negative on the global semiconductors space amid signs of frothiness throughout the industry. Per a research note from this morning via Hedgeye Semiconductors Sector Head, Craig Berger:
- “We note Atmel's Memory shipments have grew 13% QOQ in 2Q14 and are guided to grow double-digits again in 3Q14. We have not seen consecutive double-digit growth quarters in Atmel's memory business even once in the last thirteen years of history (though mid-2009 came close).”
- “Semiconductor Upcycle now means Modest Downcycle Reset later. In short, when the sector is in the throes of an Upcycle (even a modest one), then there will inevitably be a revenue/earnings estimate reset process that could play out over three to nine months (modest Downcycle).”
- “Currently, chip customers are feeling more confident about global macro conditions, and are modestly replenishing chip and finished goods inventories to higher levels.”
- “Now, chip lead-times are starting to expand and supply is tightening, which could either increase in magnitude from here or begin to fizzle out into early 2015.”
- “Either way, even if there is not 'too much' inventory in the supply chain, some chip firms' shipment levels could be 5%-15% above real end consumption levels.”
- “This drives chip firms to have to 'reset' estimates at some point in the future to 'normalize' shipments with end consumption levels.”
- “Conclusion: This Upcycle is getting long in the tooth. Chip stocks have spent 256 weeks in Upcycle Trends versus only 26 weeks in a brief Downcycle (most of 1H11). Only one Upcycle in history has been longer (1 at 272 weeks).”
- “The two most similar (i.e. muted) Downcycles were in 2006 and 2011, lasted 24 weeks and 26 weeks, and with Chip stocks falling by 21% and 32% peak-to-trough, respectively.”
CLICK HERE to view a brief, ~7 minute video with Berger and Hedgeye CEO Keith McCullough delving deep into these industry dynamics.
Jumping back to Taiwan, we see that the island economy is clearly mirroring the semis Upcycle. Specifically, looking to just about every single relevant high-frequency growth data point coming out of Taiwan, we see that economic activity in Taiwan is accelerating on both a sequential and on a multi-duration trending basis!
Is this is as good as it gets, however? The market is certainly starting to have that debate. While our GIP model continues to portend a positive growth outlook for Taiwan here in the third quarter, it is also calling for a sharp deceleration into Quad #3 for the fourth quarter.
In the context of the aforementioned quantitative signals and this readily identifiable roadblock within our intermediate-term TREND duration, we think it’s best for investors to step aside and book the gain in Taiwan here.
In the spirit of keeping score – win, lose or draw (though we tend to avoid the latter two options w/ our country-picking) – the EWT ETF has appreciated +2.2% since our JUN 3 note. That compares to a sample mean of +2% for the 24 country-level ETFs we track across the EM space and a -0.6% decline for the S&P 500 SPDR ETF Trust (SPY). Annualizing those returns would result in a +12.5% gain for the EWT vs. a -3.4% decline for the SPY.
Associate: Macro Team