Total Recall: the memory chip supply/demand sweet spot

Over the past 20 years, overcapacity has created wildly cyclical pricing for both DRAM and NAND devices[1], which in turn has led to fewer manufacturers. For DRAM devices, just three global players now account for 95% of supply[2]; for NAND devices there are just five companies producing 92% of global supply.[3]

In consequence, supply discipline has improved – even as demand has surged thanks to developments in artificial intelligence and ‘cloud’ computing. Pricing has soared as a result – with spot prices for NAND chips up 50% and DRAM spot prices up 115% over the past year.[4]

While we recognise that the industry is a cyclical one, we believe the current/supply dynamic is good news for companies involved in the sector, particularly those that have committed to shareholder rights.

Caroline Keen – Newton, a BNY Mellon company

[1] Dynamic Random Access Memory (DRAM) and NAND Flash memory chips are commonly used to store data in computers, smartphones and digital cameras.

[2] The Register: ‘Guess who’s getting fat off DRAM shortages? Yep, the DRAM makers’, 18 May 2017

[3] IHS Markit: ‘NAND Memory Market Tracker’, Q2 2017

[4] Dow Jones: ‘Samsung Topples Intel as World’s Biggest Chip Maker’, 30 July 2017. Data from DRAMeXchange, a publication that tracks memory chip sales and prices.

Over the past 20 years, overcapacity has created wildly cyclical pricing for both DRAM and NAND devices[1], which in turn has led to fewer manufacturers. For DRAM devices, just three global players now account for 95% of supply[2]; for NAND devices there are just five companies producing 92% of global supply.[3] In consequence, supply discipline has improved – even as … read more

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A parting of ways for the US and Europe?

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as much when at the end of June its President Mario Draghi said the European economy is on the cusp of transitioning from deflation toward reflation.

Meanwhile, other lead indicators in Europe, including GDP growth and earnings revisions, continue to improve driven by cyclical sectors. Despite the recent pullback in oil and commodity prices, cyclical sectors like consumer discretionary and materials have seen strong year-over-year earnings trends as underlying commodity prices remain higher than 12-18 months ago.

Mark Bogar – The Boston Company, a BNY Mellon company

An uptick in Eurozone economic data as well as relative political stability are among the factors most likely to drive a wedge between the performance of the US and European economic blocs in coming months. Recent PMI readings in Europe were far better than expected, with some modest semblance of inflation coming back into the system. The ECB acknowledged as … read more

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In Rude Health

“Nobody knew that healthcare could be so complicated”. So wrote an exasperated President Donald Trump in February 2017 as he struggled to get to grips with a replacement for the Affordable Care Act, the Obama-era law that expanded affordable medical cover to low-income Americans.

Perhaps without meaning to, Trump stumbled across one of the universal truths about healthcare investing: It can be really, really complex. There are hundreds of healthcare companies we could invest in. At most, we target between 10 and 12 of those. To get from that wider opportunity set to just a handful of investable ideas is where the real hard work comes in.

One strategy is to focus on innovation. Beyond the list of top-ten pharmaceutical companies. there’s a long tail of smaller, incredibly innovative businesses that are creating the drugs and therapies of the future. By focusing on them, we think we can uncover strong, investable ideas which are not only profitable but which could also help shape the future of medicine.

Stephen Rowntree – Newton, a BNY Mellon company

“Nobody knew that healthcare could be so complicated”. So wrote an exasperated President Donald Trump in February 2017 as he struggled to get to grips with a replacement for the Affordable Care Act, the Obama-era law that expanded affordable medical cover to low-income Americans. Perhaps without meaning to, Trump stumbled across one of the universal truths about healthcare investing: It … read more

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How are European fund selectors allocating to high yield?

Growth in the US and Europe should be sufficiently positive to support earnings momentum this year, keeping defaults in check. However, there remains a risk from increased protectionism, due to President Donald Trump’s policies. Credit fundamentals remain solid, helped by robust economic conditions and decent earnings growth. Despite the significant tightening in yields and credit spreads, the high-yield sector still looks relatively attractive compared to many other asset classes (even in a rising-rate environment). We think the technical picture remains supportive for the European high-yield market. We do not envisage European interest rates moving significantly higher, given continuing political issues, concerns surrounding Greece and ongoing European Central Bank purchases. The US high-yield market, however, could experience some short-term weakness from further interest rate hikes, exchange-traded fund outflows and a weaker oil price.

Uli Gerhard – Insight, a BNY Mellon company

Growth in the US and Europe should be sufficiently positive to support earnings momentum this year, keeping defaults in check. However, there remains a risk from increased protectionism, due to President Donald Trump’s policies. Credit fundamentals remain solid, helped by robust economic conditions and decent earnings growth. Despite the significant tightening in yields and credit spreads, the high-yield sector still … read more

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A long goodbye to NIRPs and ZIRPs

Thanks largely to central-bank intervention, the list of zero- and negative-yielding eurozone bonds is a long one.

But we think that’s about to change. For one thing, we’re predicting steady economic growth and a consequent uptick in inflation. In response, central banks – the European Central Bank among them – will likely not only raise interest rates but also begin to wind in their quantitative easing programmes.

While we can point to a lot of complacency in the market right now, we do think attitudes are going to shift at some point – and when they do, core European income will begin to face headwinds. We might not be at the end of negative yields just yet – but certainly we think we’re at the end of the beginning.

Brendan Murphy – Standish, a BNY Mellon company

Thanks largely to central-bank intervention, the list of zero- and negative-yielding eurozone bonds is a long one. But we think that’s about to change. For one thing, we’re predicting steady economic growth and a consequent uptick in inflation. In response, central banks – the European Central Bank among them – will likely not only raise interest rates but also begin … read more

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Asset allocation: Why less is sometimes more

The image above shows a grid of horizontal, vertical and diagonal lines with 12 black dots at various intersections. Most people are only able to see one or two of the black dots at any one time. Named Ninio’s Extinction Illusion after Jacques Ninio, the French scientist who first published it in 2000 – it speaks to the weakness of peripheral vision in humans but also to the brain’s tendency to fabricate patterns when confronted with uncertainty.

In our view, this optical illusion serves to illustrate another point. It demonstrates a wider truth in investing: that the more expansive a portfolio is, the harder it is to maintain oversight of all the underlying holdings. Far better, we believe, to define your universe, allocate capital with conviction and zone in on what’s important to you as an investor.

Nick Clay – Newton, a BNY Mellon company

The image above shows a grid of horizontal, vertical and diagonal lines with 12 black dots at various intersections. Most people are only able to see one or two of the black dots at any one time. Named Ninio’s Extinction Illusion after Jacques Ninio, the French scientist who first published it in 2000 – it speaks to the weakness of … read more

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On the road to an EV future

At Newton, we are predicting the end of the road for the internal combustion engine as electric vehicles gain traction.

First there is the environmental angle. The European Commission has laid out plans not only to tighten emissions testing for automakers but also to leverage far higher penalties on companies that fail to make the grade. As of 2019, this levy will take the form of a €95 fine per CO2 g/km above the limit for each vehicle produced if the average fleet emission breaches targets. For a company like Volkswagen with 3.65 million units sold in Europe in 2016, even just being three grams above the EC’s emissions target would translate into a €1bn fine.

We also think electric vehicles offer numerous benefits over petrol or diesel engine cars. For one thing, they have fewer moving parts which makes them far more reliable and cheaper to maintain. They are also potentially safer and, as anyone who has test driven a Tesla can testify, they can offer a fun driving experience with 100% of torque available at 0rpm.

In our view, it’s not a question of if but when EVs overtake their fossil fuel counterparts.

Mathieu Poitrat Rachmaninoff, Newton

At Newton, we are predicting the end of the road for the internal combustion engine as electric vehicles gain traction. First there is the environmental angle. The European Commission has laid out plans not only to tighten emissions testing for automakers but also to leverage far higher penalties on companies that fail to make the grade. As of 2019, this … read more

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US banks ‘ace’ Fed stress tests

In our view, this year’s CCAR[1] process – which all 34 systemically important US banks passed – points the way to a brighter future for the financial services sector.

The results support our belief that the market has been under-appreciating the magnitude of capital return both this year and importantly next year when the new administration chooses their pro-business appointees at the Federal Reserve.

As long-term relative price-to-book ratios in the sector suggest, a whole group of undervalued companies in the sector have good prospects even if only part of the reform package of President Donald Trump gets through.

John Bailer – The Boston Company, a BNY Mellon company

[1] The Comprehensive Capital Analysis and Review (CCAR) is an annual exercise by the Federal Reserve to assess whether the largest bank holding companies operating in the United States have sufficient capital to continue operations throughout times of economic and financial stress

In our view, this year’s CCAR[1] process – which all 34 systemically important US banks passed – points the way to a brighter future for the financial services sector. The results support our belief that the market has been under-appreciating the magnitude of capital return both this year and importantly next year when the new administration chooses their pro-business appointees … read more

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Shielding from inflation

If you are looking to invest for the long term, we believe you should look to protect your assets against the potential ravages of inflation. Unlike cash and most conventional bonds, assets with inflation-linked contracts, such as renewables and infrastructure, are very attractive for long-term investors/savers because they offer a degree of in-built inflation protection. A large proportion of the revenue streams of these assets are backed by government subsidies making them a generally robust and stable proposition.

Renewables can provide stable long-term cash flows, with a good line of sight. Yet it is an asset class that tends to get overlooked despite being less affected by quantitative easing and zero interest-rate policies compared to other financial assets.

As long as the sun comes up every day, you’re going to sell power for something. In some senses, investing in renewables is like investing in bonds, except with some sensitivity to the price for generating power.

Paul Flood – Newton, a BNY Mellon company

If you are looking to invest for the long term, we believe you should look to protect your assets against the potential ravages of inflation. Unlike cash and most conventional bonds, assets with inflation-linked contracts, such as renewables and infrastructure, are very attractive for long-term investors/savers because they offer a degree of in-built inflation protection. A large proportion of the … read more

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Is this a sure sign of a Chinese slowdown?

Infrastructure investment has been a great source of interest for investors in the wake of Donald Trump’s election as US president, with his campaign pledge to spend US$1 trillion on US infrastructure projects clearly playing on their minds. Away from President Trump’s Twitter feed and speeches, China is a more pressing concern.

While the country is trying to rebalance to become a more consumption-driven economy, overcapacity in the construction industry remains a big issue. The country is considerably overbuilt in relation to GDP. Worryingly, if a slowdown in GDP growth occurs, we expect the Chinese government to try to plug the gap with further building. As such, with overcapacity remaining a problem and rebalancing of the economy continuing, we believe it is best to avoid businesses related to Chinese construction, including materials and building companies.

Nick Moss – Newton, a BNY Mellon company

Infrastructure investment has been a great source of interest for investors in the wake of Donald Trump’s election as US president, with his campaign pledge to spend US$1 trillion on US infrastructure projects clearly playing on their minds. Away from President Trump’s Twitter feed and speeches, China is a more pressing concern. While the country is trying to rebalance to … read more

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