Have investors still got chips on the plate? Global instability may force a rethink

The Taiwan Semiconductor Manufacturing Company – TSMC – is the world’s largest maker of the superfast microchips that power cars, computers, phones and almost every other part of modern life.

Such is the potential extra demand for its wares from artificial intelligence, electric vehicles and renewable energy operators that the legendary investor Warren Buffett has snapped up shares worth £3.3bn.

This may be small change for his £565bn Berkshire hathaway fund. But is it still a message that TSMC – dubbed ‘the enabler of future technology’ by Morgan Stanley – is a bargain buy?

Or does TSMC’s position at the centre of the tech cold war between China and America make the geopolitical challenges insurmountable, especially given the implications of the unrest in China?

TSMC, the world’s ninth-largest quoted company, has a 53pc market share, thanks to its know-how, skilled workforce and spending power – the sort of characteristics that Buffett seeks. he requires that businesses have a wide ‘economic moat’ that can repel competition.

A 110-mile wide strait separates Taiwan from China. But the larger neighbour claims Taiwan as its own, causing The economist magazine to call the island ‘the most dangerous place on earth’.

The protests over Covid protocols in major Chinese cities that sent tremors through markets could incline Beijing to step up its threats against Taiwan as a demonstration of its overall authority.

This week, our Prime Minister Rishi Sunak said that the golden era of UK-China relations is over. But tensions between China and western nations have already been heightened by the policies of the American President Joe Biden.

The new Chips and Science Act aims to limit the supply to China of advanced chips for use in AI or military purposes. The US is also seeking to reduce its reliance on Taiwan by providing subsidies to companies fabricating chips in the US.

In 1990 America accounted for 37pc of global chip output, but this is now 12pc, although it is the world’s second-biggest customer for all types of chips, after China.

The recent protests in China have unsettled markets because of the risks to global supply chains, although Beijing may have to shift its stance.

Philip Shaw, chief economist at Investec, comments: ‘There is a clear conflict between the policy and China’s need to rescue its weakening economy. The campaign to improve vaccination rates is now going to be crucial.’

The damage being caused by the protests to TSMC and others is a factor in the 32pc fall this year in the PhLX Semiconductor Index.

ASML, Broadcom, Intel, Nvidia and Qualcomm are among the other major names.

TSMC’s shares are 21pc below their level of January, although Buffett’s intervention did bring a bounce-back.

This will come as a relief to holders of such funds as Baillie Gifford Positive Change, Franklin Templeton emerging Markets and Fidelity Asia that have stakes in the company.

Chetan Sehgal, at Templeton trust, says: ‘We continue to believe TSMC is among the best stocks emerging markets have to offer.’

BUT anyone who, like me, is thinking of following Buffett needs to consider whether the geopolitical downside and the downcycle in the market caused by the global slowdown are satisfactorily reflected in the current price.

TSMC, whose market capitalisation is 12.6trillion Taiwan dollars (£330bn) is valued at just 12.7 times forecast earnings.

Andy Wong of LW Asset Management, the hong Kong wealth manager, thinks it ‘a great value play in the long-term’ – a view that seems based on Morgan Stanley’s forecast that the market will revive in the second half of 2023.

TSMC has 17 plants – 15 in Taiwan, two in China – and is building a £10bn plant in Phoenix, Arizona, which, it is rumoured, could supply Apple by 2024.

Apple accounted for a quarter of sales in 2021. Clients could also number Tesla, and a second plant in the state is a possibility.

Phoenix is around 1,300 miles from the hQ of Berkshire hathaway in Nebraska. Buffett would concede he is some distance away from understanding the technologies behind chip fabrication.

But he seems persuaded of the need for these components and the profits on offer: TSMC’s operating margin is about 50pc.

Investing in this company based in a dangerous place is hazardous, but sometimes that’s part of the fun, which is why I will be looking to add some other chip stocks like Nvidia – down 48pc this year.