21/04/25: Japan, Semiconductors & Chinese supercomputers

Monday Espresso Podcast - 21st April 2025

Rory Dowie: [00:00:00] Good morning. The date is Monday, the 21st of April. I hope you all had great long weekend here in the UK. My name is Rory Dowie, today I have the unenviable task of stepping in for Nathan Sweeney, but thankfully today I'm joined by Nicholas Warmisham. Nick is part of the equity team here at Marlborough, so good morning, Nick, great to have you on the pod.

Nick Warmisham: Good morning, Rory.

Rory Dowie: So last week we spoke about bond markets, and over the previous weeks we've been kind of round the houses on the US, Europe, and tariffs. Nick specialises on the Japanese markets, and I think given some of the news flow last week, particularly around some of those positive negotiations between Japan and the US, I thought it might be insightful to get a bit of an update in terms of what's going on, you know, further east. But first and foremost, Nick, what was going on in markets last week?

Nick Warmisham: So markets were a bit steadier last week than the big swings we saw the week before.
Europe ended approximately 2% up with the US flat to marginally down for the week, within the US it was the tech heavier parts of the market, which suffered relatively more with the NASDAQ [00:01:00] 100, the top 100 tech companies in the US down around 2%, although this has been a theme we've seen a lot this year.

Year to date, the picture still hasn't really changed. With the US being the key laggard across developed markets, off about 10%, with Europe being roughly flat.

The main red day of the week was on Wednesday where comments from Jerome Powell, the chairman of the Federal Reserve, led to US equities selling off.

He made some hawkish comments, hawkish meaning someone who favors more restrictive monetary policy such as higher rates for longer.

He commented that economic growth has likely already cooled in early 2025 versus this time last year. Importantly, he was asked if the Fed would step in if the stock market continues to fall, to which he replied, no.

He thinks the market's functioning as it should, even with the uncertainties. Over recent years, investors have become accustomed to what we call the Fed put. This is a common term that describes the belief that the Federal Reserve will step in with [00:02:00] accommodative measures to bouy markets if they fall. So that is what really drove the negative day last week, though better incremental news on tariffs held the US and the weak on a positive footing.

Rory Dowie: Thanks for that, Nick, so, yeah, look, absolutely. Market's a bit less volatile than what we'd sort of been used to a bit this year. They studied a little bit and as I say, that incremental news at the end of the week really kind of helped bouy markets and, and finish green into the end of the week.

So yeah, perhaps Nick, you could kind of give us a bit more detail on some of that news we saw towards the end of the week, obviously there was the news on Japan, but we did also see Trump and the Trump administration imposing some additional restrictions on some semiconductor chips, so what's the latest update there?

Nick Warmisham: Well, there is some positive news on Japan and US trade negotiations. On Thursday, Trump announced that negotiators had made big progress in talks with Japan on a trade deal. Talks didn't result in an immediate halt on tariffs, but preparations are underway for another round of talks later this month.

Trump's main issue is that Japan is currently exporting $63 billion to the US more than they import from the US, [00:03:00] meaning they have a $63 billion trade surplus with the US.

These negotiations are a positive for Japan as some parts of the market are quite exposed to the US, for example, some of the automobiles and component companies that produce components and parts that go into cars.

Though actually a lot of the Japanese market is quite domestically focused, and it is one of the few parts of the world where we have seen some positive corporate earnings revisions.
Regarding semiconductor chips, Trump announced on Thursday that he has barred Nvidia from selling its H20 chips, one of its main AI chips in China.

The US administration believed that these chips can help China to build a supercomputer, so are keen to limit their tech progress if possible. The US clearly doesn't want China to get ahead in the AI race. This is a further indication that these chips are almost like the new oil with them being weaponized geopolitically.

Nvidia also stated those restrictions on the H20 chip would lead to a $5.5 billion write down for the current quarter, the stock was off approximately [00:04:00] 10% on the day as a result.

Also, we saw a subtle change in the tone from China this week with them saying they're ready to talk if Trump treats them with respect.

Overall, the main thing to highlight is that 70 other countries are in negotiations with the US so this is certainly an area to watch closely.

Rory Dowie: Yeah, so it definitely sounds as if that news is kind of getting incrementally more positive, but obviously, clearly still a huge amount of uncertainty there, seeing what we've seen with the restrictions on the, on some of NVIDIA's exports into China.

So as I say, still a lot of uncertainty, but perhaps we are getting incrementally better news on the tariffs.
I guess you mentioned Nvidia. There we are into Q1 earnings season. Given, you know, your focus is on Japan, Taiwan, not a million miles away. Taiwan Semiconductor, a crucial part of the AI ecosystem, obviously they reported their first quarter numbers last week, so Nick was there anything to note there?

Nick Warmisham: Yeah, so Taiwan Semiconductor or TSMC, is the largest maker of semiconductor chips and a crucial part of the AI ecosystem, and they [00:05:00] reported numbers on Thursday.

They posted a sales beat for Q1 this year, meaning that sales were ahead of their expectations. Interestingly, they reiterated full year revenue for 2025 stating AI related demand is expected to be robust.

With the company commenting that they had not detected any change in customer behavior so far, although they also cautioned that they are still in the early days of this tariff shock and may well see more impact over the next few months.

Rory Dowie: Yeah, so I think that's a really interesting data point. So coming into this earnings season, the bar had been quite low, and obviously this is a company which is beats for the first quarter, and that's something we expect. But you know, really our concerns have been around, might we see guidance start to be reduced for the rest of the year? i.e. the market will start to bring down their estimates and management pull down their estimates for what they can deliver the rest of the year.

But actually TSMC here, you know, they've reiterated that full year, so that's obviously something which the market has reacted positively too, stocks was up on the day and as I say, and we'll be watching these very, very closely, we're still very, very early on in earnings season. [00:06:00]
I think, you know, obviously talking about earnings season, we've also had it start in Europe, we had two of the luxury names reporting, so Nick, any update there?

Nick Warmisham: Yeah, so as you've said there, Rory, two of the European luxury names have reported, so LVMH, i.e. Louis Vuitton and Hermes is the maker of the coveted (by some) Birkin bag, both had similar themes coming through, a softness from Chinese luxury demand. This has been the case for a while now and is only likely to continue given the tariffs.

Hermes also announced it was increasing prices in the US as of May the first with relatively more inelastic demand due to the high-end luxury nature of the brand, this means passing tariff costs onto the consumer.

Rory Dowie: Yeah, so again, one of those many levers that these companies can pull, you know, they can either absorb that kind of cost pressure from tariffs or they can kind of pass it on to consumers. So you are literally seeing that in action there with Hermes in terms of what they're doing with it, particularly given that inelastic demand.

So I think that that was a very interesting kind of data point there. And I guess looking ahead, Nick, what can we expect next week? Anything on the horizon?

Nick Warmisham: [00:07:00] Yeah, so next week in the US, economic indicators, including Purchasing Managers Index (PMI) across manufacturing and services, also data on housing. In Europe, we are set to see similar data released.

The main thing is the corporate earnings update for Q1 with heavyweights like Proctor and Gamble and Alphabet, the parent company of Google reporting.

Rory Dowie: Brilliant. Thanks very much for that, Nick, you know, and as always, we'll be on top of those earnings and we'll give you an update going forward.

Thank you all for listening, very insightful Nick, please if you have any questions, send them in, we'd love to answer them if possible. But until next time, hope you all have a great week.