Navigating Volatility Amid New Export Controls
- Investment Research
- Nov 12, 2024
- 3 min read
Market Overview
Recent U.S. restrictions on semiconductor exports could introduce volatility across the semiconductor sector and broader tech market. However, the fundamentals for quality AI-related companies remain robust, underscoring opportunities for investors with a long-term perspective.
Key Insights
The U.S. Department of Commerce’s latest order restricts Taiwan Semiconductor Manufacturing Co. (TSMC) from supplying advanced AI chips to mainland China, effective November 11. This mandate applies to chips designed at 7 nanometers or more advanced. Following the announcement, TSMC shares in Taipei dropped by 0.5%. This latest round of controls extends the restrictions set in 2022, which limited exports from companies like NVIDIA and AMD. As more details unfold, volatility within the semiconductor sector may persist, but we anticipate investors will pivot back to fundamentals as the uncertainties clear.
Sector Impact and Investor Outlook
Historically, semiconductor stocks have faced sharp corrections in response to export controls, such as the Philadelphia Semiconductor Index’s 15-20% drop between 2022 and 2023. However, these declines proved short-lived, with stocks rebounding as companies adapted. We expect this pattern to hold, as the AI growth story remains compelling for high-quality semiconductor names.
Big Tech’s commitment to AI is still a key driver of growth in the sector. Combined capital expenditures are forecasted to grow 50% to $222 billion this year, with a further 20% increase anticipated in 2025. Companies heavily exposed to AI semiconductors, such as those specializing in GPUs, custom chips, and high-bandwidth memory, stand to benefit significantly.
Strategic Takeaways
For investors, this environment calls for strategic positioning. Those with low AI exposure may utilize structured solutions to build long-term allocations, while those heavily weighted in AI may look to capital preservation strategies to mitigate near-term volatility.
Trump Trade and interest rate outlook
The re-election of President Trump has reignited the so-called “Trump trade,” driving rallies across equities, bond yields, and the dollar. The S&P 500 rose by 4.7% last week, marking its best week of the year. Treasury yields climbed across the curve, and the dollar strengthened to a four-month high. A drop in volatility, with both the VIX and MOVE indices declining week-over-week, has also supported positive sentiment.
CAF Group Perspective: Fiscal and Policy Risks
While the initial market reaction has been favorable, potential risks remain. Fiscal constraints could limit the feasibility of expansive policies. The U.S. deficit is now double its 2016 level, posing challenges to further fiscal measures. Additionally, new tariffs or tax reforms could influence investor sentiment and market dynamics in the months ahead.
We anticipate that the Fed may respond to changing economic conditions with additional rate cuts, targeting a 25-basis-point reduction by year-end and another 100 basis points in 2025. In this low-rate environment, investors might focus on U.S. equities and consider five-year Treasuries or investment-grade bonds to lock in attractive yields without taking on excessive duration risk.
CAF Group continues to monitor these developments closely, emphasizing that while export controls may introduce volatility, strong fundamentals in quality AI-related companies should provide resilience. Investors should remain alert to policy shifts and macroeconomic indicators, positioning themselves with structured strategies designed to capitalize on secular AI growth trends while preserving capital in uncertain conditions.
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