Fund Managers See Water Risk in Semiconductor Bets Being Mispriced

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Investors in semiconductor stocks face a growing threat to industry valuations: a chronic shortage of water.

For Abrdn Plc, there are now few issues as pressing as water for the sector, according to David Smith, a senior investment director for Asian equities at the asset manager.

Abrdn, which holds stakes in Taiwan Semiconductor Manufacturing Co. and ASML Holding NV, isn’t alone in its view. Morgan Stanley analysts warn of shortages and tensions ahead with technologies like artificial intelligence requiring vast amounts of water, while climate change and extreme heat are making access more precarious than ever.

Achieving such goals is becoming increasingly challenging as the planet heats up. Bloomberg Intelligence estimates that Taiwan is facing “abnormal climate patterns” due to global heating and weather patterns such as El Nino, which has the potential to impact “the stability of its water supply.”Last year, TSMC’s water per wafer mask layer rose 14.5%, hurting its efforts to meet a 16% savings goal, BI analysts Charles Shum and Sean Chen wrote in an August note.

But there are some notable exceptions. One of the world’s biggest climate funds, which is managed by Nordea Asset Management and adheres to the European Union’s strictest ESG rules, didn’t hold TSMC at the end of July, according to the latest available data compiled by Bloomberg. The sector has soared as semiconductors support everything from artificial intelligence to building 5G technology. Valuations also have been underpinned by supply concerns fanned by US-China tensions and the trade barriers that have ensued. But with the Nasdaq Global Semiconductor Index up about 40% year-to-date, some investors are starting to look for potential cracks. That’s particularly true for a few of the sector’s absolute top performers, with Nvidia up more than 200% this year.

 

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