Analyst: China Could Drive Recovery For Semiconductor Stocks In 2023

The iShares China Large-Cap ETF FXI traded higher by 0.2% on Monday after China relaxed some of its COVID-19 shutdown rules.

On Monday, Bank of America semiconductor analyst Vivek Arya said China's reopening could open the door for significant upside for top semiconductor stocks.

Semis Bouncing: The iShares Semiconductor ETF SOXX had a horrendous first three quarters of 2022 but has bounced in recent weeks. In the past month, the SOXX ETF was up 12.9%. Arya said the recent rally could be from a combination of several catalysts, including bullish market technicals, strong seasonality, optimism about COVID-19 reopening in China or a downturn in inflation.

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Arya said the rally could simply be driven by expectations that China will drive a fundamental recovery in semiconductor demand in the second half of 2023, regardless of whether or not the U.S. economy slips into a recession.

"Even if the U.S. slows down in CY23, global chip demand could be boosted by a potential upturn in China (BofA Economists predicting solid acceleration to above-consensus 5.5%/6.5% China GDP in CY23/24E from 3% in CY22)," Arya said.

How To Play It: Heading into 2023, Arya remains bullish on top U.S. semiconductor stock picks, including Advanced Micro Devices, Inc. AMD, NVIDIA Corporation NVDA and Broadcom Inc AVGO. He said the recession in the semiconductor industry already happened, starting in the second quarter of 2022, setting the industry up for easy year-over-year comparisons in the second half of 2023 and into 2024.

While the consumer may be weakening, Arya said chip inventory adjustments have helped create a floor for the industry that may support stock prices.

Benzinga's Take: Semiconductor industry fundamentals may be improving, but it could still be difficult for semi stocks to gain much traction if U.S. interest rates continue to rise.

Long-term investors can simply ignore the medium-term volatility in semi stocks and continue to focus on long-term demand from secular growth sources, such as high-performance computing, artificial intelligence and the Internet of Things.

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