Chips with everything!

 

The recent, elevated tension in the Strait of Taiwan following Nancy Pelosi’s visit has again highlighted the tension between China and Taiwan.  As a result of the global pandemic and Russia’s invasion of Ukraine which disrupted supply chains, governments and companies have been reviewing where key components are sourced from. Taiwan stands out within global supply chains as it provides a significant amount of the world’s semi-conductor chips.

In August, President Joe Biden signed a law committing $280bn to high tech manufacturing and scientific research, amid fears the US is losing its technological edge to China. This includes $50bn aimed at building up the US semi-conductor industry.

More recently, the US administration has announced that American tech companies that receive federal funding will be barred from building ‘advanced technology’ facilities in China for 10 years. In addition, US chip makers Nvidia and AMD have been told by US officials to stop the sale of artificial intelligence chips to China. This looks to be ‘a shot across the bow’ at China and will further escalate trade tensions which began under the Trump administration. Meanwhile, the UK government has had to review the acquisition of Newport Wafer Fab by Nexperia which is owned by Chinese firm Wingtech Technology.

Elsewhere, India has vowed to spend $30bn to make itself less reliant on chip makers in the US and China. Last week, Taiwanese Foxconn and Indian mining giant Vedanta announced they are to invest £17bn in building one of India’s first chip making factories.

While the US is looking to restrict the flow of technological expertise to China, the risk is that China could counter by restricting the export of rare earth minerals that are vital to a number of key renewable industries. The war in Ukraine has dominated news headlines but the long-term strategic technology war between the US and China appears to be quietly simmering away in the background. Last week also saw a meeting between China’s leader XI Jinping and Russia’s Vladimir Putin at a summit to show an ‘alternative’ to the western world according to the Kremlin.

What have we been watching?

The rally in global risk assets towards the end of the previous week came to a juddering halt last week following the hotter-than -expected US inflation numbers for August with the jump in core CPI especially unsettling. While markets are sensing we are closer to peak inflation, nonetheless it is proving stickier than expected and suggests central bankers may need to keep applying the brakes through hiking interest rates. US equity indices suffered their biggest daily reversal since mid-2020. Government bond yields continued to climb with the US 10-year Treasury approaching 3.5% -its highest level since 2011. A massive week ahead for central bank interest rate policy! Weak UK retail sales data saw Sterling hit a 37-year low against the US Dollar at around $1.14 – not helpful for inflation or Bank of England.

German Chancellor Olaf Scholtz spoke to President Vladimir Putin and told reporters ‘Sadly, I cannot tell you that the impression has grown that it was a mistake to begin this war and there was no indication that new attitudes are emerging.’ Ukraine continues to re-take lost ground. Russia appears to be retaliating with missile strikes on Ukrainian infrastructure with a reservoir dam in the south of the country the latest target.  European gas prices started to fall once again last week given the mild weather and as many countries are now much closer to hitting winter storage capacity.

Further to our recent Alpha Bites on energy shortages, French nuclear power production at EDF plants hit a 30-year low in August with more than half of the reactors offline. Another of our more frequent Alpha Bites themes has been supply chain challenges. Workers at Felixstowe, the UK’s largest container port have voted for a second eight-day strike which threatens further supply chain disruption particularly for retailers looking to stock up ahead of Christmas.

Read our latest UK investment insights from Alpha PM

 

In the UK, falling petrol prices brought inflation down in August with annualised CPI easing back from 10.1% to 9.9%. However, core inflation edged up from 6.2% to 6.3% and annualised food inflation is estimated to have accelerated to 12.4%. Furthermore, even with the energy price cap, household bills are still expected to rise significantly in October. The Bank of England (BoE) is more likely to increase interest rates this week by 0.75% rather than by 0.5%.

The volatility that afflicted UK economic growth data over the summer is set to continue, with the additional bank holiday in September adding a further complication. The re-bound in July GDP was weaker than hoped for although the heatwave boosted some consumer facing sectors, industrial production fell. A mini-Budget will take place this week on Friday 23rd September in which new Chancellor Kwasi Kwarteng is expected to confirm the cost of the cap on energy prices.

 

Eurozone industrial production was much weaker than expected in August contracting by 2.4%.

 

In the US, falling gasoline prices saw annualised inflation ease to 8.3% in August but core CPI increased to 6.3% from 5.9%. Much of the upward pressure came from ‘sticky’ housing-related components such as rent. Following the inflation numbers, a 0.75% interest rate hike is almost fully baked-in by markets with a 20% chance of a full 1% move. Futures are suggesting a 50% chance of US interest rates hitting between 4.25%-4.5% by December. 

 

Chinese retail sales and industrial production were better than expected in August although the release comes ahead of the Communist Party Congress and China is still suffering from regional Covid-19 lockdowns while the property sector is still in a deep hole!

Read our latest investment insights from Alpha PM

 

Brent oil held at $92 despite the hot US inflation numbers and prospect of higher interest rates.

Finally, another example of how life has changed post pandemic. Bristol has encouraged the use of public transport to improve air quality. Unfortunately, the main bus operator First Bus is facing a real challenge. First, it has been unable to recruit enough new drivers (a legacy of last year’s HGV crisis) and is now seeing less frequent passenger journeys (WFH and typical 3 trips a week to the office instead of 5). First Bus is considering cutting a number of loss-making routes. I remember a chief executive of a bus company once telling me that the definition of a bus was a ‘moneybox on wheels’ How times change!

Read Last Week’s Alpha Bites – Russian Roulette

Further information about Alpha Portfolio Management, our products and services, please visit www.alpha-pm.co.uk or email info@alpha-pm.co.uk. Alternatively, you can call us on 0117 203 3460.

This publication is for informational purposes only and should not be relied upon. The opinions expressed here represent analysis by an Alpha Portfolio Management representative at the time of preparation and should not be interpreted as investment advice.

You should seek professional advice before making any investment decisions. The past is not necessarily a guide to future performance. The value of shares and the income from them can fall as well as rise and investors may get back less than they originally invested. The sender does not accept legal responsibility for any errors or omissions, in the context of this message, which arise as a result of internet transmission or as a result of changes made to this document after it was sent.

Alpha Portfolio Management is a trading name of R C Brown Investment Management PLC which is authorised and regulated by the FCA.
Registered Office: 1 The Square, Temple Quay, Bristol, BS1 6DG. Registered in England No. 2489639
Copyright © 2021 Alpha Portfolio Management, All rights reserved

Full version