Semiconductor ‘upcycle’ to extend BlackRock Greater Europe’s returns
BlackRock Greater Europe (BRGE ) fund managers Stefan Gries and Alexandra Dangoor believe chip makers are only just entering an ‘upcycle’ despite the enormous boost their businesses have already received from the hype around artificial intelligence (AI).
Exposure to semiconductors helped the £633m portfolio strongly outperform the FTSE World Europe ex-UK index in the six months to 29 February with net asset value (NAV) rising 20.5% and the share price up 18.9%, almost doubling the benchmark’s 9.6% return.
Three major semiconductor companies – all of which are rated by Citywire Elite Companies – sit in the fund’s top 10 holdings and delivered the strongest returns over the half-year period: ASML, the second largest holding at 7.9%; ASM International, a separate Dutch company at 3.7%; and BE Semiconductor which makes up 4.4%.
‘Over the past six months, there has been increasing evidence of the positive impact from AI on the semiconductor sector as material orders from large technology companies started to come through,’ said the managers.
‘We seem to be entering a semiconductor upcycle, which tends to have duration and can produce significant opportunities for growth.’
Gries and Dangoor noted that the scale of capital expenditure increases that technology companies have committed to build out AI infrastructure and capabilities is ‘impressive’ and not confined to the US.
‘This is not solely a US phenomenon and we believe we own European stocks that will see significant benefits from this investment spend.’
BE Semiconductor was the largest contributor to returns over the six months, thanks to its position as ‘one of the leading providers of packaging solutions such as hybrid bonds, which is set to become an increasingly important technology, enabling semiconductor chips to continue getting smaller, yet more powerful and more energy efficient’.
Other hotspots
Increased capital expenditure is not just occurring in the semiconductor industry and Gries and Dangoor expected there to be other ‘capex winners’.
‘After a long period of underinvestment from many corporates post the global financial crisis, we believe we are at the beginning of significant investment spend to come,’ they said.
Companies enabling the energy transition should benefit as the electrification of the economy continues, as should those working in re-shoring supply chains.
The duo believe their position in Schneider Electric, which was another strong performer, will continue to do well from its emission reduction solutions that help make public and private buildings more energy efficient.
‘On the infrastructure side, Schneider holds a leading position in medium voltage solutions that allow for making power grids smarter, more energy efficient and capable of dealing with renewable energy,’ they said.
‘The infrastructure segment is expected to grow at a double-digit rate over the next few years.’
However, capital commitments aren’t always a positive. Danish logistics company DSV was the largest detractor to returns over the six months after it entered into an exclusive $10bn logistics joint venture with Saudi’s Neom city project which the managers said ‘led to concerns over the capital intensity of the project, as well as a shift in business strategy’.
The managers have discussed the issues with the DSV management team and are ‘somewhat reassured that the deal is financially solid and DSV has protection mechanisms in place should the project disappoint’. Nevertheless, they have trimmed the position.
The managers added one stock with industrial gases group Linde brought in on the back of ‘strong pricing power’ and the fact it is ‘geared into structural growth in energy transition and capex spend’.
Overall, Gries and Dangoor said they are ‘cautiously optimistic’ given falling inflation and the economy remaining resilient, even with European interest rates at a high 4% that is set to be lowered this summer.
‘Financial conditions have already started to ease and mortgage rates in many European countries are already falling,’ they said.
‘Leverage in the corporate sector is low, margins are strong, and the end of the destocking cycle in sight, with a positive inflection to come.’
Over five years, BlackRock Greater Europe is the second-best performer in the seven-strong AIC Europe sector. It has provided a 95.7% return, beating the peer group’s 65% average but behind the leader, Fidelity European (FEV ) on 103%. The shares stand on a comparatively narrow 4.3% discount to NAV which is tighter than the one-year average of 5.7%.