Jesmond Mizzi Financial Advisors’ Chief Investment Officer Marc El-Lazidi discusses semiconductors, artificial intelligence and the geopolitical challenges markets are facing in 2023

The recent earnings season saw semiconductor companies post less than ideal results yet their stocks have been rallying. How do you explain this?

I think it is partly to do with the excitement generated by the launch of ChatGPT, which has led to lofty expectations of an AI-dominated future, but it is also a reflection of investors’ eagerness to put last year’s volatility and disruption behind them.

In fact, it’s something we’re seeing more or less across the board - not just with semiconductors, but equity markets in general. People’s perceptions don’t seem to be aligned with reality. We’re seeing contractions in industrial production and a loss of business confidence, with inflation still uncomfortably high. So by most accounts, the market’s confidence is misplaced.

What would you say were the main takeaways from earnings season?

Generally speaking, semiconductor companies reported better earnings than one might have expected given recent market upheavals, but I would say that Intel emerged as the most significant loser. Its stock fell 8% the day earnings were reported reflecting the fact that investors have greater concerns about its business.

There are a number of reasons for this, including the fact that Apple no longer uses Intel chips in its products. COVID-19 also hasn’t helped Intel since most people have shifted from working on their office PC to their home Macbook.

There’s also a general lack of demand for certain types of electronics since most people made significant purchases at the start of lockdown and probably aren’t yet ready to spend big again, especially considering all the talk of recession and economic declines.

Server chips is another area where Intel has failed to keep up with competitors. In fact, AMD posted much better results, mainly as a result of its server business. Even when it comes to AI, it appears that Intel has lost the battle to other players like NVIDIA, and it is likely to take some time and effort for it to catch up.

So COVID-19 disruption is still with us…

Yes, especially when it comes to inflation. Throughout the pandemic we saw monetary policy and government fiscal stimulus pump huge sums of money into the economy which eventually sent inflation through the roof.

Another impact was that many people, especially in the US, were able to invest in the stock market. Americans have more control in their retirement savings, thanks to accounts like the 401k, whereas Europeans rely heavily on government-funded pensions. This difference allowed people in the US to benefit significantly more from the fantastic stock market rally in 2020 and 2021. The wealth generated in the US during this period was simply fantastic.

China and the US increasingly appear to be setting themselves up for conflict with one another. Could this be a market mover in 2023?

Given all of the headlines we’ve seen since the start of the year I’d say there is definitely a possibility of waking up to unpleasant geopolitical headlines like we did in February last year when Russia invaded Ukraine.

This would be a very significant development with huge implications on the global economy, especially the microchip sector, which is at the core of pretty much every tool we use today. A large part of the semiconductor supply chain, including many global chokepoints, is situated in Asia, and Taiwan in particular, so a conflict would certainly result in a massive disruption.

For example, companies like AMD and NVIDIA depend on Taiwan Semiconductor Manufacturing Company (TSMC), which is why the Biden administration, working closely with the company, is setting up a massive manufacturing facility in Arizona as quickly as possible.

After the launch of ChatGPT late last year, we’re now seeing a race to integrate AI into search engines. How should investors be approaching the tech sector?

The hype around AI is understandable because the public has been given a taste of the power the technology will unleash. My guess is that it will be a while longer before we all own AI home robots, but I suspect many governments will be hoping for it to happen sooner rather than later in order to mitigate some of the effects of declining populations, like we already see happening to some extent in Japan.

Marc El-Lazidi.

As far as investors are concerned, the objective should remain finding the signal in the noise – determining which company is likely to win the AI war in the medium to long-term. Microsoft has won the first battle by incorporating ChatGPT into its Bing search engine, and while one can’t write Google off just yet, it’s a good reminder that even giants can fall from time to time. Who knows, maybe it will go from leader to follower like Intel.

What is certain is that this new technology is very likely to change the tech landscape and one would do well to monitor it closely over the next year.

What about Europe? How can it maintain some sort of influence in a global tech sector increasingly dominated by US and Chinese players?

Although Europe has not produced tech giants like Google or Microsoft, it is recognised for its high standards and regulatory frameworks. That said, this isn’t quite the same as driving innovation.

The continent seems small compared to the US and China and its landscape fragmented, with innovation limited to the country level. Europe will need to reinvent itself somehow in order to be able to adapt to the changing global landscape as shaped by these tech superpowers.

This interview is issued by Jesmond Mizzi Financial Advisors Limited and does not intend to give investment advice and the contents therein should not be construed as such. The Company is licensed to conduct investment services by the MFSA, under the Investment Services Act. Investors should remember that past performance is no guide to future performance and that the value of investments may go down as well as up. For further information contact Jesmond Mizzi Financial Advisors Limited of 67, Level 3, South Street, Valletta, on Tel: 21224410, or email info@jesmondmizzi.com