Things are improving at the bottom Semiconductors –solid ... · the semiconductor producers themselves • Sales and earnings are volatile, however the long term growth is 8-10%

End August 2019 update www.nordic-investment-partners.com

Nordic Investment Partners

Things are improving at the bottom

Semiconductors – solid growth in 2020s

Nordic Investment PartnersSeptember 2019 update



17 trillion dollars of bonds with negative rates

Going into the soft patch of the year with trade war focus

and significant lower interest rates

World stocks declined 2-3% in August and the USD rose 1.5% as the China/US trade war rhetoric's hardened.

Volatility in stock markets rose and investors ran to the so-called safe heavens; bonds. Bonds worth 17 bn $ have negative interest rates so it’s fair to ask what kind of safe heaven that is. You get wet no-matter what.

Consumer stables and high dividend utilities had a decent performance, while cyclical assets declined in value.

The financial media carry these stories every day, so what's in store for 2020 is probably more interesting.

Since early 2018 the global growth has been good, but at a steadily lower pace. The latest reads are around 3%, which are fine. The issue is Europe with close to 0% activity increase, US slowing below 2% and Asia a bit of a mixed bag due to the effect of tariffs on Chinese exports to US.

With a narrative is for slower activity going forward, one should not be blind for the positive effects of the massive decline in interest rates. Consumers and businesses can refinance their mortgages and release significant amounts for alternative use or increased savings. The first signs of better economic activity down the road has already started to emerge, but it’s too early to say it’s a done deal.

If things works out on the positive side then 2020 could be a year of surprisingly better activity. And that is not included in either stock prices or bond yields today.

Stock market analysts tends to be too optimistic in their forecast, but after the last few quarters with turtle speed earnings growth then the forward roadmap is less bullish.

Now, stock prices like lower interest rates, so if the bond market reverse into slightly higher rates – Germany could go from minus 0.70% to minus 0.25% and US could rise to 1.75% from current 1.50% - then the reaction will likely be lower stock prices - at least for the ‘safe heaven stocks’ trading above 30x earnings. That is the magic and frustration of the modern financial markets.



The blessing and annoyance of negative ratesNegative interest rates is an unusual phenomenon that economists and central bankers probably get even more grey hair of.

The lender gets money from the saver in that world, so what kind of savers place their money with negative rates, when cash gives zero and you can investment in a portfolio of liquid stable companies paying a dividend of more than 2%?

Financial regulation requires that pension funds and other regulated entities move to defined safe assets (government bonds) in times of negative returns, so regulation makes the demand for sub zero bonds – not rational investment behavior.

The very long term effect is that savers wealth moves to lenders for reduction of their debt, so it’s a kind of sophisticatedconfiscation or advanced wealth transfer.

German 10-year rate since 2004After the IT bubble central bankers provided cheap moneyfor a while, which combined with loose regulation resulted inbooming real estate markets. As tightening hurt and it turned out the loan packages for real estate could have been of a better quality, then the finan-cial crisis emerged.

It’s interesting to look back and see how the German bund hasmoved lower and lower and it’s now at a level very few hadpredicted

Since stock markets are very sensitive to bond yields it’s oddstocks have been flattish 2-4 years (see next page)



Trade gives prosperity in open competitive economies

The trade war that started in Spring 2018 with steel and aluminumtariffs for imports into US has gradually escalated. The current level of import tariffs between US and China will likely chip of 500 billion $ of economic activity. The global GDP is 80.000 billion $and grows 2.500 billion $, so growth is just slower. It’s not a crisis.

German economy shows 0% activity growth due to lower manufacturingactivity and lower inventories, but the underlying activity (consumption and jobs) is healthy. Germany re-designed the labor market under GerhardSchröder and is today much more agile than before. The prospects for an outright recession therefore seems limited

The Nordic region have 25 million people and some of the most openeconomies in the world. The level of prosperity is high and wages are hightoo, so plenty of arguments for constant trade deficits.

That is however not the case as productivity and innovation has generatedproducts and services that are in demand elsewhere so exports are evenhigher than imports.

The US version is the value added products from US companies are produced outside US as labor costs and productivity are not competitive.That is not changed with a tweet and import tariffs, but via fundamentalredesign of the US economic system. Germany did it over 10 years, soUS could be the ‘new US’ in 2035 – if they really want.

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Is USA really that much better in business?Nordics USA World ex USA



Sector positioning /selected sectors

August provided more trade war anxiety and volatility. Investors ran for safe heavens such as utilities and food/beverage.

Low interest rates is poison for banks and customer deposits vs lending rates depress margins. Banks consequently fell

Next chapter is to see if economic activity picks up, which would benefit cyclical sectors that are priced as if a recession is already a reality

US growth rate is boosted by the tax reduction in 2018. Underlying earnings growth is estimated at 6%

Sector performances (price in local currency)

1 month 20192018-21 EPS

CAGRP/E19 PEG ratio

Auto -4,1% -0,6% 5% 7,2 144Banks -4,2% 10,6% 4% 11,1 278Food/beverage 3,1% 18,1% 5% 19,2 384Healthcare -0,7% 5,3% 8% 15,9 199Oil/gas -5,5% -1,9% 10% 18,0 180Retail (incl Amazon) 1,3% 19,4% 11% 18,1 165Tech -0,6% 25,6% 9% 17,8 198Semiconductors 1,1% 30,3% 9% 16,6 184

S&P500 -0,2% 16,7% 11% 16,6 151

Auto -2,6% 2,6% 5% 6,4 128Banks -3,8% -4,6% 1% 8,2 820Food/beverage 3,3% 34,7% 7% 19,8 283Healthcare 2,8% 14,3% 6% 16,5 275Oil/gas -1,9% 0,1% 9% 11,4 127Retail 1,8% 14,9% 4% 15,9 398Tech -2,0% 19,7% 12% 20,5 171Telecom 0,9% -0,9% 4% 13,7 343

Stoxx 600 0,4% 12,4% 6% 13,8 230

Based on consensus

30/08/2019



The semiconductor industry



Semiconductor industry provides structural growth of 10%

The quest for companies and industries to grow over the long run will intensity even more in a world where growth rates toward 2050 are lower than in the past 30 years. One of the most promising pockets of growth drivers is semiconductors; the small thing that makes everything work in a digital world.

Semiconductors plays an increasing significant role in everyday life as more and more consumer products, cars, services and surveillance includes memory and processing of data.

The universe of semiconductors is diverse from small chip design shops to mega large semiconductor fabs costing 15bn $ for a new plant.

The industry is valued on level with the overall stock market at 16x despite the higher growth profile. This is mainly caused by the historical volatility in earnings..

The biggest players are Intel, Broadcom, Nvidia, Samsung Electronics, SK Hynix, TSMC (Taiwan), Applied Materials and ASML

Things to know about semiconductors

• It’s a 440 billion $ industry or 0.5% of global economy

• memory chips account 35% of sales and logic processors around 24%. The rest is chips for everything from your toaster to self-drive cars and crypto mining i.e. 40% of market is very diverse

• equipment to make semiconductors is a 65 billion $ industry and more concentrated than the semiconductor producers themselves

• Sales and earnings are volatile, however the long term growth is 8-10% and probably faster in 2020s due to AI, big data, IoT and lots of new uses

• Semiconductor stocks have combined market cap of 1.2 trillion $ or 2.5% of global stock market



A volatile year to year industry

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Semiconductor industrySemi sales Capex ratio

As seen from the chart on the right earnings forecast for US semiconductor industry seems to be all over the place over time

The chart below gives a better indication of the direction and chart in righthand corner indicates 2019 is a bottom year. Worst year since 2009.

The 2020s will bring a lot of new uses for semiconductors, so the forward growth profile looks very interesting.



Semiconductor index performance since 1995



Key investment view towards 2030

• Fiscal and monetary stimulus since 2008 have created ever larger imbalances such as government debts. This will probably continue even as it gets beyond sustainable in some countries

• Global economic growth has been declining since 1960s from 6% to around 3% in late 2010s. Productivity and population growth points towards lower economic growth in the coming decades. The underlying growth in global affluence will however continue and with Emerging Markets having 2-3 times faster growth than Developed Markets

• There’s nothing wrong with 1-2% GDP growth, but many investors have been accustomed to 8% annual return, while the realistic forward return is more likely to be below 5% and achieved with 3% earnings growth and 2% dividend. Annual swings are likely to remain in the 15-20% interval, so it’s not going to be boring no matter what

• The traditional business and inventory cycle still applies, so from period to period growth and inflation will change. In a world with evermore data and analytics the efficiency of eco systems will likely reduce the magnitude of economic swings as end-to-end value chains reduce slack and inefficiency. Risks of financial mis-allocation of capital is the same

• In a investment world on those conditions Advice Capital Vision Fund and I focus on identifying companies and business clusters with unique structural growth and then invest in these when growth/profitability/valuation triangulation justifies it. The investment focus in Advice Capital Vision Fund is on identifying, holding and harvesting multibaggers based on these principles. Good stewardship and ESG applies to the companies invested in.

‘Be patient – multibaggers takes time’

Roadmap 2019 check



Follow up on key assets for route 20195 months along the roads and we have reached destination for 2019 in April in terms of expected return. Mutual fund outflow in Europe has been significant and the trade war jitters in May caused some investors to sellMarkets are expected to be volatile over the summer period and before markets can resume the upward trajectory based on 2020 earnings. A recession is not factored in as there’s no recession.

Asset/item Actual End 2018

Forecast end 2019

Forecast return 2019

Actual YTD May 2019

Residual return 2019 Comment to expectation for 2019

MSCI World 453 505 11% 9% 3% 3% dividend and 8% earnings growth

S&P500 2.607 2.900 11% 6% 6% 2.5% dividend, 1% multiple contraction and 8% earnings growth

Stoxx 600 336 385 15% 10% 5% 3.7% dividend, 8% multiple expansion and 3% earnings growth

MSCI Asia Pac 146 160 10% 4% 5% 3% dividend, 6% earnings growth and 1% multiple expansion

Brent oil 54,2 70 29% 14% 15% New oil exploration is low. Givng supply/demand balance a lift

Copper 2.648 3.200 21% 1% 20% Electrification (EV etc) lift demand for copper

10 year bond € 0,28% 0,75% -0,21% Normalization of ECB quent easing will increase yields

10 year bond $ 2,91% 2,85% 2,13% Slower economic pace will reduce bond yields

Smartphone sales 1.435m 1.460m 1.420m Flattish 1.5bn since 2016, so replacement starts in 2019

Car, SUV sales 97m 99m 98m Europe and US flattish, China weaker and EM stronger

Data center traffic 11.6 ZB 14.1 ZB 15.0 ZB Streaming, games and crypto mining create very high growth



Summary

2019 roadmap is for a fairly good investment year due to a mix of continued but uneven economic expansion and fair valuation of stocks. To get a really good investment climate it requires a few things;

1. the trade war threat and subsequent risk of a global recession gets solved

2. the economic activity levels grow 3%. 1-2% in developed regions and 4-7% in emerging markets

3. inflation and interest rates continue to be around 1-3%

4. wage growth is moderate, but provides enough comfort for consumers to continue spending

5. expectations for earnings growth has come down significantly and fast, and 2019 most likely will be a flat year (a recession obviously will take earnings into negative territory). 2020 earnings must show at least 5% growth

6. 2019 can be a 10%+ year as valuations normalize to 20 year averages. Expect the first half to be volatile and very sensitive to new data points. And second half the fundamentals improve and confirm investors that got on the slopes early

The global demographic glacier is moving and unstoppable. Products and services that can reduce healthcare cost while improving the

quality of living will see increased demand. So healthcare will continue to provide good growth and high profitability

Some sectors like Automotive have seen significant declines and several companies with massive net cash positions are now valued as if they don’t exists in 3-4 years. A rerating of beaten up sectors is likely but be alert as those sectors are often of cyclical nature



Disclaimer

This material has been prepared by Nordic Investment Partners and Advice Capital A/S. Advice Capital A/S is a Danish asset management

company, under supervision of Danish Financial Regulator.

The material is for personal information only and only for individuals who have received the material from Nordic Investment Partners or

Advice Capital A/S. The material is based on public available information’s and own analysis of data.. Nordic Investment Partners and Advice

Capital A/S do not have responsibility for the correctness, accuracy or the full scope of the information's in this material. Any opinion or

viewpoint should not be taken as recommendation to buy or sell the financial assets discussed in the material. Nordic Investment Partners

and Advice Capital A/S has no responsibility for decisions taken based on content in the material.

Information about historical performance and stimulation of previous and future performance is not to be used as a reliable indicator for

future returns. Performance and returns can be negative as well as positive and several factors such as currency moves can impact

performance. To the extent there’s information about tax and potential tax on returns it’s investors responsibility to properly investigate tax

implications. Taxes can change over time, so investor need to be aware of this factor.

In case the performance information is based on gross returns, investor should be aware that fee’s, provisions and other costs can impact the

net return.

The material is not to be used as an offer to buy or sell and investment product.

This material is confidential and to be kept private. It is not allowed to forward or distribute the material without prior consent by Nordic

Investment Partners and Advice Capital A/S.

Documents

Things are improving at the bottom Semiconductors –solid ... · the semiconductor producers themselves • Sales and earnings are volatile, however the long term growth is 8-10%