Preview
In focus: Semiconductor sector
The semiconductor sector remains in focus at the start of 2024, as selected stocks have rallied amid robust results and an improving outlook. The MSCI World Semiconductors and Semiconductor Equipment Index1 outperformed the global benchmark with a 9% gain in January 2024,2 following its 89% return in 2023.3 In Asia, performance was relatively mixed, but several stocks have similarly recorded sizable year-to-date gains.
We have a broadly constructive view of the semiconductor sector, where inventory issues are potentially easing and earnings growth looks set to improve over the next 12 months. However, stock selection and valuation discipline remain key, in our view.
Investment outlook
Market sentiment has improved materially. A year ago, there were significant concerns about a hard landing due to rising inflation, tightening monetary policy response and a looming energy crisis. So far in 2024, the markets have priced in a “soft-landing” scenario. Although the economy may continue to slow, any recession is likely to be mild, and it is anticipated that central banks will begin cutting interest rates by the second quarter.
At Templeton Global Equity Group, our concern is less how macro scenarios will ultimately play out, and more about the impact that different scenarios are having on individual company valuations and expectations. We continue to strive for what we view as genuinely diversified portfolios with different types of values maturing along their respective investment cycles. This focus on fundamental, bottom-up value and long-term business forecasting remains at the heart of our investment approach, and we believe it can help lead to successful client outcomes over time despite the market’s periodic knee-jerk reactions to evolving macro conditions.
Market review: January 2024
Global equities continued to rise in January 2024, but momentum has slowed compared to the fourth quarter of 2023, as waning optimism about central-bank rate cuts and mixed corporate results affected sentiment. As measured by MSCI Indexes in US-dollar terms, developed-market equities outperformed the global index, while emerging and frontier market equities trailed it. In terms of investment style, global growth stocks rose but global value stocks declined in January.
The market entered the new year with high hopes that major central banks, particularly the US Federal Reserve (Fed), might begin cutting benchmark rates soon. However, cautious messages by multiple Fed spokespersons during the month tempered that optimism. Subsequently, Fed Chair Jerome Powell ruled out a March cut after the latest policy meeting in late January, although confidence in the US inflationary and economic outlook remained high. The European Central Bank has similarly pushed back on rate cut expectations, even as the eurozone only narrowly avoided recession in the fourth quarter. Meanwhile, corporate results for the December quarter offered some signs of recovery but still largely pointed to persistent headwinds, with the blended US market earnings year-on-year growth still far below its five-year average.4
Endnotes
- The MSCI World Semiconductors and Semiconductor Equipment Index is composed of large and mid-cap stocks across 23 developed markets countries. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.
- Source: Bloomberg. As of February 1, 2024.
- Source: MSCI. As of December 31, 2023.
- Source: FactSet. As of February 2, 2024.
WHAT ARE THE RISKS?
All investments involve risks, including possible loss of principal.
Equity securities are subject to price fluctuation and possible loss of principal.
Small- and mid-cap stocks involve greater risks and volatility than large-cap stocks. There can be no assurance that multi-factor stock selection process will enhance performance. Exposure to such investment factors may detract from performance in some market environments, perhaps for extended periods. Active management does not ensure gains or protect against market declines.
International investments are subject to special risks, including currency fluctuations and social, economic and political uncertainties, which could increase volatility. These risks are magnified in emerging markets. Investments in companies in a specific country or region may experience greater volatility than those that are more broadly diversified geographically. The government’s participation in the economy is still high and, therefore, investments in China will be subject to larger regulatory risk levels compared to many other countries.
There are special risks associated with investments in China, Hong Kong and Taiwan, including less liquidity, expropriation, confiscatory taxation, international trade tensions, nationalization, and exchange control regulations and rapid inflation, all of which can negatively impact the fund. Investments in Taiwan could be adversely affected by its political and economic relationship with China.
Investments in fast-growing industries like the technology sector (which historically has been volatile) could result in increased price fluctuation, especially over the short term, due to the rapid pace of product change and development and changes in government regulation of companies emphasizing scientific or technological advancement or regulatory approval for new drugs and medical instruments.
Any companies and/or case studies referenced herein are used solely for illustrative purposes; any investment may or may not be currently held by any portfolio advised by Franklin Templeton. The information provided is not a recommendation or individual investment advice for any particular security, strategy, or investment product and is not an indication of the trading intent of any Franklin Templeton managed portfolio.