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US restrictions on advanced tech help foundry benefit from Beijing’s shifting view of the semiconductor supply chain

Contract chipmaker Hua Hong Semiconductor has long played second fiddle to China’s national champion Semiconductor Manufacturing International Corp in their home base of Shanghai, but US restrictions on advanced technology and Beijing’s yearning for chip self-sufficiency have thrust it into the spotlight.

Already listed in Hong Kong, China’s second-largest chip foundry received regulatory approval last month for a $2.5bn secondary listing in Shanghai on the tech-centric Star Market. Most of the funds to be raised are intended for upgrading and expanding its production facilities.

Hua Hong’s lack of cutting-edge technology has proved a boon rather than a handicap of late. During its third-quarter earnings call in November, the company said it had been barely affected by the actions of the US, as the chips it produces are several generations older than the latest microprocessors.

Industry experts said China had to re-evaluate its domestic semiconductor supply chain after Washington imposed curbs on the development of high-performance chips. Hua Hong’s focus on older chips could make it Beijing’s new favourite, with the benefits of policy support and funding to follow.

“Our years of pushing for localising advanced chip production had almost reached a dead end,” said a Shanghai-based government official who did not wish to be named. “The vulnerability of the localised semiconductor supply chain has been exposed by the latest restrictions on us accessing crucial US equipment.”

Washington introduced a series of sweeping restrictions in October, which have barred US companies from exporting technology for producing chips with features smaller than 14 nanometres, or 16nm in some cases. This made it much harder for leading producer SMIC to catch up with the advanced factories, or “fabs”, of competitors such as Taiwan Semiconductor Manufacturing Co.

Hua Hong told the Financial Times it had “always been in full compliance on rules and regulations with respect to export control” and would continue to try to attract investors domestically and globally because of the large capital expenditure required for capacity expansion.

Compared with SMIC, Hua Hong has adopted a different strategy of optimising its manufacturing techniques for the mature “nodes”, or generations, of its less-miniaturised chips in order to maximise the performance and reliability of its products. They have found wide use in the Internet of Things, 5G telecoms equipment and electric vehicle markets.

“Just try to squeeze the most juice out of the mature nodes,” said Douglas Fuller, an expert in China’s semiconductor industry at Copenhagen Business School. “That’s a sustainable path now when we count all the subsidies and the rate of return to society.”

Hua Hong’s older processes also provide an opportunity for less advanced Chinese chip equipment makers to test and improve their products by supplying its production lines and replacing foreign tools that may become restricted.

“For Chinese equipment manufacturers, replacing imported equipment on Hua Hong’s mature process lines is more easily achieved,” said William Li, a Taiwan-based analyst at research firm Counterpoint.

Hua Hong has also acted to localise its suppliers in areas such as equipment and materials, according to three people familiar with the matter. In addition, it is giving domestic customers higher priority.

Earlier this year, the chipmaker cut orders several times from foreign customers in order to prioritise domestic companies as its production capacity became overstretched, according to four Hua Hong employees who did not wish to be named.

Hua Hong’s products for original equipment manufacturers are increasingly competing with Germany’s Infineon and Texas Instruments of the US.

“Many Chinese customers have replaced imported modules with homegrown ones since geopolitical tensions escalated,” said an executive from a power module company in the southern hub of Shenzhen. “So we are partnering with Hua Hong to pick up as many orders as possible.”

The executive, who preferred to remain anonymous, said Chinese manufacturers such as Hua Hong and SMIC were more co-operative and “more willing to come down in price” for the struggling chip market.

According to the Shanghai government official, one way to encourage core industry players to concentrate on basic chips was to accelerate the process for Hua Hong’s secondary listing. Almost 70 per cent of funds raised will be invested in its only 12-inch (300mm) wafer fab, in the eastern city of Wuxi, according to its prospectus.

A government adviser working with fabs across China who did not wish to be named said Hua Hong had been underrated in the past by industrial policymakers. It was seen as taking a less proactive role in research and development.

When the state-backed China Integrated Circuit Industry Investment Fund restructured its investment portfolio last year, it chose to divest Hua Hong shares. However, it returned in June with a $232mn investment.

Strong demand in its home market meant Hua Hong’s third-quarter results stood out among its foundry peers. Quarterly revenues grew 40 per cent year on year to $630mn, while net profits doubled to $104mn compared with the same period a year earlier.

Analysts at Jefferies investment bank said the growth in capacity at the Wuxi fab would increase Hua Hong’s momentum, earning it more orders from local chip design houses.

“Hua Hong will be a strong force driving the domestic chip supply chain’s growth,” said the government adviser.

Former Yugoslav nation long in pursuit of closer integration with EU switches to single currency on January 1

Ivo Božić, a stallholder selling trinkets at the Christmas market in Croatia’s capital Zagreb, is used to handling multiple currencies and thinks the transition will go without hitches when the country adopts the euro on January 1.

“If you deal with tourists, you most certainly have several currencies in your head,” said Božić, whose wares include puppets in colourful costumes, fridge magnets with Christmas patterns and handmade jewellery. “I have bank accounts in multiple currencies and I guess I’ll just merge them next year,” he added. “Some of my stuff I’ve bought for euros anyway.”

When Croatia next week becomes the 20th country to use the euro it will be a milestone for a nation of 4mn people that has long strived for closer integration with the rest of the EU. Croatia will also join Europe’s border-free Schengen zone.

The switch from the kuna should bring benefits, say economists, because Croatia relies on the single currency area for more than half its external trade, two-thirds of foreign direct investment and roughly 70 per cent of its tourists.

It will also be a symbolic boost for European unity just as Russia is trying to disrupt the bloc’s opposition to its war in Ukraine. European Central Bank president Christine Lagarde called the addition “a vote of confidence for the euro area” and said Croatia would benefit from the “shield of the euro”.

Adopting the euro is in some ways a natural progression for a country where the single currency already accounts for half of its total bank deposits and 60 per cent of overall loans — more than any country outside the eurozone.

“Croatia is the country that stands to profit the most from entry into the eurozone,” as it would eliminate foreign currency risk, said Boris Vujčić, governor of the Croatian central bank. “Foreign exchange risk in Croatia is the highest.” 

“When your currency depreciates against the euro it means your debt is worth more,” Vujčić said in an interview with the Financial Times. “So your borrowing costs as a country are higher to reflect this risk.” 

Croatia has €27bn of foreign exchange reserves — 40 per cent of its gross domestic product — to cover this, he said, although joining the euro meant it would “not need anywhere near as much.”

The benefits of the euro are “most visible during a crisis”, Vujčić stressed, pointing to recent selling pressure on the Hungarian forint, Polish zloty and Czech krona. “They had to intervene and increase interest rates a lot and their 10-year government bond yields are now 5 to 8.5 per cent,” he said.

In contrast, Croatia’s 10-year bond yield was about 3.5 per cent, lower than Italy and Greece and just above Spain’s, even though it has yet to join the euro. “There’s a huge credibility effect,” said Vujčić, who will get to vote on ECB policy decisions from January after already joining meetings as an observer.

Vujčić recalled how prices soared out of control in the former Yugoslavia and then Croatia during the late 1980s and early 1990s, suggesting he would take a hawkish stance to aggressively tame the price rises that are worrying Europe’s policymakers.

“I have seen the beast and I know how the beast behaves if not checked in the right way at the right moment,” he said.

He admitted to a risk that Croatian consumers would blame introducing the euro for high inflation, which last month hit 13.5 per cent. Yet, on average, countries that have adopted the euro have experienced only a 0.2 to 0.4 percentage point rise in inflation, albeit in periods of lower price growth.

To improve pricing transparency, shops in Croatia have had to display the cost of goods in both kuna and euro since September and will continue to do so until the end of 2023. Businesses have been threatened with fines it they seek to take advantage of the switch to raise prices.

“The handover is coming at a time when inflation is already high, so the starting position is that Croatian consumers are very price sensitive,” said Michał Seńczuk, chief executive of Studenac, one of Croatia’s leading grocery chains. “That makes it hard for any merchant to impose unjustified price increases because, if you do, shoppers will go to your competitors.”

The switch has been a logistical challenge for retailers and the authorities. Studenac had to print and display 5mn new price labels, while his staff have had to explain to confused customers that it could not accept euros until January 1, after which both currencies will be used in parallel for two weeks.

Seńczuk predicted that as well as boosting tourism, having the euro would make Croatia “more attractive to foreign buyers looking for second homes, either for summer vacations or for the milder winters we have here.”

The central bank, meanwhile, has brought in the army to store and guard some 40 per cent of kuna coins that it expects to be exchanged for euros.

“That’s almost the weight of the Eiffel Tower,” said Vujčić. “We’ll sell it as metal after three years and then the army can put their tanks or armoured vehicles [back] into storage space.”

The luxury titan behind LVMH bought Casa degli Atellani, a 15th-century landmark in the city center.

LUXURY LEONARDO: Leonardo Da Vinci’s vineyard and former residence in Milan’s city center has a new luxury mogul owner, one who knows a thing or two about winemaking.

According to press reports, industry titan Bernard Arnault, the chairman and chief executive officer of LVMH Moët Hennessy Louis Vuitton, has bought a storied building known as Casa Degli Atellani in Milan from its previous owners, the descendants of the Conti and Portaluppi families.

The value of the transaction or the purpose of the acquisition were not disclosed and LVMH representatives did not respond to requests for comment Friday.

Built around 1490, the landmark was donated by Ludovico “Il Moro” Duke of Milan to Da Vinci in 1498 while he was in town to paint his masterpiece “The Last Supper.” After changing hands and ownership over time, the Milan residence located on tony Corso Magenta was acquired in 1919 by senator and entrepreneur Ettore Conti, whose son-in-low, famed architect Piero Portaluppi, was tasked with restoring it.

The 15th century townhouse hides a verdant courtyard that is home to Da Vinci’s vineyard, currently the only existing wine-producing estate in the center of a metropolis. Neglected and destroyed, the 16-row, or around two-acre, vineyard was carefully restored in 2014 and finally unveiled to the public during the 2015 international Expo held in Milan.

Since its reopening the landmark has welcomed visitors and tourists and boasts six for-rent apartments. It has hosted a number of private events, including fashion shows and presentations, and cocktail receptions.

The news was first reported by Italian newspaper Corriere della Sera.

Arnault, whose net worth was estimated at $181.8 billion as of December, according to Forbes, is among the world’s richest men, often competing for the top spot with entrepreneurs including Tesla and Twitter owner Elon Musk and Amazon’s Jeff Bezos.

In addition to controlling fashion brands such as Dior, Louis Vuitton and Givenchy, among others, LVMH owns 26 firms in the wines and spirits category, including Ruinart, Dom Pérignon, Moët & Chandon and Veuve Clicquot. It also boasts a hospitality division, under the other activities moniker, which includes luxury operators such as Cheval Blanc and Belmond.

In 2013 the French group took a majority stake in storied Pasticceria Confetteria Cova Srl, owner of the Cova brand and of the Cova Montenapoleone Srl firm that manages one of Milan’s most fashionable and iconic coffee houses, located on Via Montenapoleone.

Nurses, ambulance staff and rail workers all set to walk out in January amid anger over government refusal to talk

The UK faces a fresh wave of strike action in the new year, as nurses, ambulance staff and rail workers prepare to walk out over pay.

The PCS union, which represents striking civil servants including Border Force staff, on Friday warned industrial action would be ramped up even further if the government continued to refuse to negotiate over pay.

Britons are braced for travel disruption over the festive period, with the RMT rail union organising a strike on Christmas Eve, meaning UK roads are likely to be far busier than usual.

Rishi Sunak is contending with a series of strikes across the public and private sectors as workers respond to the cost of living crisis by demanding higher pay.

The prime minister, who has insisted public sector pay restraint is necessary to curb high inflation, said on Friday he was “sad and disappointed” at the level of disruption being caused by industrial action.

“I want to make sure we reduce inflation, part of that is being responsible when it comes to setting public sector pay,” he added.

Mark Serwotka, PCS general secretary, warned of months of strikes across the civil service if the government refused to discuss this year’s pay settlement with unions.

“I think in January what you’ll see is a huge escalation of this action in the civil service and across the rest of our economy unless the government gets around the negotiating table,” he told the BBC.

The Royal College of Nursing, which organised strikes by nurses last week and on Tuesday, announced further industrial action in England on January 18 and 19.

The RCN had said ministers could avoid additional strikes by agreeing to enter talks about this year’s NHS pay settlement.

Pat Cullen, RCN general secretary, said the government “had the opportunity to end this dispute before Christmas but instead they have chosen to push nursing staff out into the cold again in January”.

The RCN is demanding a pay rise of 19 per cent. In July, the government accepted recommendations by an independent review body under which most NHS workers in England received a flat-rate pay increase of £1,400, backdated to April. This represents an increase of about 4 per cent in average basic pay.

In Scotland, where RCN members voted “overwhelmingly” to reject the Scottish government’s offer of an average 7.5 per cent pay increase, the union will announce strike dates in the new year.

Meanwhile, the GMB union, which represents ambulance workers, called off a strike scheduled for December 28 in England and Wales, saying it did not wish to worry the public over Christmas.

But it announced a walkout for January 11, coinciding with a strike planned by the Unison union, which also represents ambulance workers.

Ambulance unions are pressing for a pay rise that at least matches inflation.

Health secretary Steve Barclay accused the unions of announcing “further co-ordinated strikes in January to cause maximum disruption at a time when the NHS is already under extreme pressure”.

Latest data from NHS England showed about 35,000 operations and outpatient appointments have been cancelled since the current wave of NHS strikes began last week. Health leaders are increasingly concerned at the cumulative impact on an already severely stretched NHS.

Saffron Cordery, interim chief executive of NHS Providers, which represents health organisations across the country, said the suspension of next week’s ambulance workers’ strike would defer the disruption to the new year “which is an extremely difficult period . . . even in normal circumstances”.

Meanwhile, Border Force officials on Friday began eight days of strikes at six UK airports, including London’s Heathrow.

The government warned travellers flying into the airports to prepare for delays at passport control, and drafted in military personnel to help cover for striking immigration officers.

But on Saturday morning Heathrow was operating as normal. A spokesperson for the airport said: “The Immigration halls are free flowing with Border Force and the military contingency providing a good level of service for arriving passengers.”

The PCS has strongly criticised the government’s 2 per cent pay offer for Border Force staff this year, and is demanding 10 per cent.

On the railways, RMT members will begin fresh strike action over pay at 6pm on Christmas Eve. An overtime ban will cause disruption throughout the rest of December, and further strikes are planned in January.

Edmund King, president of the AA motoring organisation, said motorists faced a “traffic nightmare before Christmas”.

Supply chain experts warn outbreak following reversal of zero-Covid curbs creates uncertainty for iPhone maker

Apple’s business is under threat from a widespread coronavirus outbreak in China, with supply chain experts warning of a growing risk of months-long disruption to the production of iPhones.

The US tech giant has had to contend with more than a month of chaos at its main assembler Foxconn’s megafactory in Zhengzhou, China, known as “iPhone City”, following a Covid-19 outbreak that started in October.

Foxconn has moved some of its production to other factories across China, while Apple has worked with components suppliers to alleviate unusually long wait times — about 23 days for customers buying high-end iPhones in the US, according to research by Swiss bank UBS.

As the Chinese government reverses its zero-Covid policy, a longer-lasting risk now looms: the potential of worker shortages at component plants or assembly factories across the country.

“We should be seeing a lot of operations get impacted by absenteeism, not just at factories, but warehouse, distribution, logistic and transportation facilities as well,” said Bindiya Vakil, chief executive of Resilinc, California-based group that tracks more than 3mn components to provide supply chain mapping services.

Apple warned on November 6 of “significant” disruption ahead of the holiday season. The rare statement came less than two weeks after executives forecast subdued sales growth in the crucial period around Christmas, of below 8 per cent.

The consensus among analysts is that company revenues this quarter will fall just below the record $123.9bn it achieved over the same period last year, with net profits projected to tumble more than 8 per cent, according to bank estimates pooled by Visible Alpha. That would break a 14-quarter revenue growth streak as Apple experiences a shortage of between 5mn and 15mn iPhones.

Many analysts had initially raised forecasts for the following six months, assuming that unfulfilled orders would be postponed rather than cancelled.

But the risks to Apple’s revenues for 2023 have increased as modelling has shown 1mn Chinese people are at risk of dying from Covid during the coming winter months after President Xi Jinping removed strict pandemic controls. One Apple store in Beijing’s main shopping district had to cut hours last week because all its workers were sick.

A fifth of Apple’s revenue comes from sales in China, while more than 90 per cent of iPhones are assembled there. Smartphone rival Samsung exited China in 2019 and has diversified assembly in at least four countries.

Horace Dediu, independent analyst at Asymco, a consultancy, said Apple’s production and operational woes in recent months could be followed by a demand crisis in China as consumers reprioritise spending habits.

“Though the rest of the world saw demand rise during lockdowns, it was due to work-from-home and stimulus,” Dediu said. “With low immunity and minimal safety nets, Chinese consumers could hunker down and avoid big purchases next year.”

Apple’s most important Taiwanese suppliers including Foxconn, Pegatron and Wistron have responded by seeking to expand their nascent Indian operations.

Prabhu Ram, head of industry intelligence group at CyberMedia Research in Gurgaon, India, estimated that upwards of 7-8 per cent of iPhones are being assembled in India, and predicted the big three Taiwanese suppliers were targeting 18 per cent of iPhone assembly to be in India by 2024.

China’s attempt to stamp out the disease rather than manage it has left the country’s assembly lines exposed, said Alan Day, chair of State of Flux, a London-based supply chain consultancy that has been working with the UN on corporate standards for responding to Covid outbreaks.

“The next two to six months really will be a defining moment for Apple’s supply chain, because of China’s immaturity of handling Covid,” Day said. “The rest of the world has developed standards, but China has been almost non-existent in getting companies to embrace those standards.”

A new kind of creative destruction is presenting the world’s semiconductor sector with a paradox.

Geopolitics and other existential factors have disrupted globalization as we’ve known it, fragmenting semiconductor global supply chains. But these same forces also present historic opportunities for innovation and growth. The world, in other words, isn’t deglobalizing. It’s reglobalizing.

These changes fly in the face of deeply entrenched economic thinking. The liberal economic model holds that short of catastrophic market failures governments need to stay out of markets. C.C. Wei, CEO of Taiwan Semiconductor Manufacturing , said this month that U.S. and Chinese measures to control the flow of technology “destroy productivity and efficiency gained under globalization.” TSMC’s founder, Morris Chang, has put it in starker terms: “Globalization is almost dead and free trade is almost dead.”

But there are real problems with the rigid application of old-school economic principles to the ongoing changes in the global economy.

First, the traditional economic calculus around supposed market failures has itself failed to account for the existential costs of predatory, state-centric behavior in an open trading system. China has upended the international system by leveraging the scale of its economy and its neomercantilist practices. The metrics that apply to open and fair trade, therefore, are no longer useful in assessing portions of strategic supply chains.

Nor does the traditional model properly factor in the destructive costs of climate change. Semiconductor supply chains have massive carbon footprints. The process of finalizing a single wafer—the substrate used in fabricating integrated circuits—involves shipping it across international borders many times.

And, finally, the old model ultimately led to a highly concentrated fabrication location, Taiwan, which now accounts for 60% of all the world’s microchips and 90% of the world’s most advanced ones. This situation is untenable, given the risks of future pandemics, natural disasters, and, of course, geopolitics.

A renaissance has begun in specialized, emerging industries of the future. They are benefitting from localized and regionalized government-led initiatives and public-private partnerships. Publicly funded efforts such as the U.S. climate-focused Inflation Reduction Act and the European Green Deal are sparking the emergence of new technological ecosystems.

All of this is driving demand for specialized semiconductors. But sectors such as electric vehicles can thrive on older, legacy technologies (chips above 10 nanometers), which require far less expensive fabrication facilities. The two new Arizona fabs TSMC announced to much political fanfare will soak up at least $42 billion to make the most advanced 5-nanometer and 3-nanometer chips, destined mostly for defense-related areas such as supercomputing, quantum science, and advanced weapons systems.

In the U.S., the Chips and Science Act has sparked deepening innovation and production partnerships involving companies and universities. SkyWater Technologies, a U.S. semiconductor company, has invested $1.8 billion to build a commercially viable foundry in Purdue University’s Discovery Park District. These kinds of partnerships will multiply. Since the enactment of Chips in August, private investment has exceeded $200 billion.

More broadly, the semiconductor Group of 5 (the U.S., Japan, South Korea, the Netherlands, and Taiwan) share fundamental values and geopolitical interests. They form the core of a reglobalization collective. These are the building blocks of a wider network of trusted partnerships.

The European Union, Japan, South Korea, and Taiwan have enacted their own Chips Act-style programs. They may seem competitive, but, long-term, this should be viewed as a positive-sum development. The chip reglobalization process already includes Intel’s recently announced $85 billion investment in foundries and R&D facilities in Germany, Ireland, Italy, Poland, Spain, and France. TSMC has invested in a new fab in Japan, in partnership with Sony , and is in talks for a new German fab.

Far from leading to a race to the bottom or an exercise in futility, as skeptics predicted, cross-fertilization has begun among the Group of 5. It has the potential to expand to other compatible markets, from Israel to Singapore to Costa Rica. Countries not historically part of the semiconductor sector, such as Australia, are exploring ways to join the renaissance.

Japan, South Korea, and the Netherlands owe their semiconductor prowess to early industrial policies. The Cold War space race resulted in the world’s first integrated circuit, made by Fairchild Semiconductor. But no nation owes more to industrial policy than Taiwan, which transformed itself from an agrarian economy in the 1970s to a semiconductor hotbed. It was none other than Morris Chang, TSMC’s grandmaster, who played a crucial role in that success. Such are the cycles of globalization and reglobalization.

Until the pandemic hit, Wall Street largely ignored the vaccine market. This year will show there’s more to jabs than fighting Covid-19.

It has been three years since the pandemic woke up Wall Street to the opportunities in vaccines. It’s time for investors to look out for more big news on the jab front—and it isn’t all about Covid-19.

In 2023, drug companies will introduce the first vaccines for respiratory syncytial virus—known as RSV—and could roll out the first flu vaccine based on messenger RNA, or mRNA. It will also be a significant year for Covid-19 shots, which are expected to make their debut on the commercial market.

Before Covid-19 made Moderna MRNA -4.44% (ticker: MRNA), Pfizer PFE 0.37% (PFE), and BioNTech BNTX -2.17% (BNTX) household names, investors showed little interest in the vaccine business. Four big vaccine makers dominated the Western market, and opportunities for disruption seemed marginal.

While the sector is still dominated by legacy vaccine powerhouses, investors are now paying closer attention.

“Things that would have typically…been largely ignored [prepandemic] as far as the Street is concerned, now, with the dollars that have been made from vaccines over the past three years, they’re back on the radar,” says Jared Holz, a healthcare equity strategist.

For investors tracking the sector, here’s what to watch in 2023.

Commercial Covid-19 Vaccines

Since the onset of the pandemic, the federal government paid for all Covid-19 vaccine doses distributed in the U.S. That’s set to change next year, as vaccines enter the commercial market.

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Pfizer has said it expects to charge between $110 and $130 per adult dose, while Moderna has discussed a price between $64 and $100. Those prices are sharply higher than the rates the companies have been charging the U.S. government—around $30 for Pfizer’s updated vaccine, and about $26 for Moderna’s version.

Pfizer could have a competitive advantage, given its more established commercial infrastructure. The pie, however, is shrinking: Analysts expect Pfizer’s Covid-19 vaccine sales to roughly halve in 2023, to $17.2 billion, according to FactSet.

RSV Vaccines

Late 2022 birthed the “tripledemic,” a term that describes the havoc wreaked by a simultaneous surge in Covid-19, the flu, and RSV. During one week in mid-November, the Centers for Disease Control and Prevention counted 5.1 RSV-associated hospitalizations for every 100,000 people in the U.S., compared with 0.6 for the same week in 2019.

For now, there isn’t much to be done about RSV, but that’s likely about to change.

Pfizer and GSK GSK -0.14% (GSK) recently announced impressive data from Phase 3 trials of their respective RSV vaccines. Others, including Moderna and Johnson & Johnson JNJ 0.25% (JNJ), are working on their own RSV jabs, though Pfizer and GSK are expected to get to market first.

RSV is a common virus that normally causes mild symptoms in healthy adults, but can be serious and even deadly for older people and infants. Pfizer and GSK are both targeting the older adult market, while Pfizer is also preparing a version to administer to expectant mothers to protect their newborns.

The Pfizer and GSK trials are hard to compare, as they used slightly different definitions of severe disease caused by RSV, but both companies’ results seem promising. GSK’s efficacy figure appeared to be slightly higher.

Pfizer’s executives, however, say they will top GSK when it comes to selling the vaccine. “I think we will be the leaders in this market,” Pfizer CEO Albert Bourla told Barron’s in November. Pfizer also claims its vaccine has better “tolerability,” meaning a lower incidence of short-term reactions, like aches or fever.

Earlier this month, Pfizer said its RSV vaccine could bring annual revenue of more than $2 billion in 2027.

GSK, for its part, says that its vaccine could be the best on the market. “We believe our magnitude of result, consistently high efficacy, including in adults ages 70-79, good tolerability, and favorable safety profile give the GSK RSV vaccine candidate best-in class potential,” says Phil Dormitzer, GSK’s head of vaccines R&D.

The FDA is set to decide on whether to approve either or both of the vaccines for older adults by May. Recommendations from the CDC, and a potential rollout, could come following a June meeting of the agency’s vaccine advisers.

Also worth watching, though lagging behind the pack: Moderna is expected to release new data on its mRNA-based RSV vaccine in early 2023.

MRNA-Based Flu Vaccines

Following the success of mRNA-based Covid-19 vaccines, mRNA-based flu vaccines have been all the rage in Big Pharma. The early 2022 release of ho-hum performance data for mRNA-1010, one of Moderna’s candidates, has failed to dampen drug companies’ ardor.

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Today, mRNA-based flu vaccines are under development by Moderna, Pfizer, and Sanofi (SNY). The eventual goal is to develop combination vaccines that could protect against multiple viruses, including the flu, Covid-19, and RSV.

Moderna is waiting on Phase 3 data for mRNA-1010, expected early in 2023. If all goes well, regulatory approvals could begin by the end of that year, the company says. “Some countries might launch in ’23,” Moderna CEO Stéphane Bancel told Barron’s earlier this month. “The balance will launch in ’24.”

Pfizer says it also expects to launch an mRNA flu vaccine in 2024. One big question is whether companies will be able to price the new vaccines cheaply enough to compete with the established flu jabs, which cost around $15. Asks Holz: “Are the [mRNA] players in flu going to be able or willing to sell the flu vaccine for that price?”

It has been a tough year for European stocks, as Russia’s invasion of Ukraine, rising inflation, soaring energy prices, the European Central Bank’s aggressive rate hikes, and fears of a recession have relentlessly pummeled the continent’s economies.

The STOXX Europe 600 index has fallen 12.5% in 2022, underperforming the Dow Jones Industrial Average, which is down some 8%, but beating the S&P 500, off 18%.

There hasn’t been a whole lot of joy for investors, but some sectors, notably energy, have performed well, and the market’s volatility has offered up plenty of buying opportunities along the way for those with good timing and a bit of luck.

At the start of the year, this column highlighted United Kingdom energy giant Shell (ticker: SHEL.UK) for being positioned to benefit from energy prices staying high for some time. In January, neither Barron’s, nor anyone else, could have predicted just how high or for how long an energy crisis might last. Less than a month later, Russia—a major exporter of oil and natural gas to Europe—invaded Ukraine, triggering the continent’s energy plight.

The crisis was a boon for Shell. Soaring energy prices led to record profit of $11.5 billion in the second quarter, followed by its second-highest quarterly earnings ever in the third. The shares have climbed 31% since we picked them.

For those who missed out on the turbocharged rise of Big Oil stocks after the war began, Barron’s in May noted that a lesser-known European energy name—Norway’s Equinor (EQNR.Norway)—was worth a look, given its attractive payout. The company paid special dividends in the second and third quarters, hiking the payout to 70 cents per share in the third. The stock climbed 8% since we wrote about it, outperforming larger peers BP (BP.UK) and even Shell over the same period.

More buying opportunities emerged in the year’s second half as macroeconomic conditions deteriorated across Europe and much of the rest of the world. Falling demand for consumer electronics and new U.S. restrictions on semiconductor exports to China hit global chip makers particularly hard.

In October, Barron’s noted that the industry’s slump suggested that investors might consider buying shares of German chip maker Infineon Technologies (IFX.Germany), which had been dragged down with the rest of the sector. Infineon is a global leader in automotive semiconductors, especially for electric vehicles. As a result, the Munich-based company had less exposure to weakening PC demand and to mounting China curbs, and could benefit from the growing EV market, this column noted.

In fact, it’s not too late to still catch the Infineon rally, with analysts forecasting an average price of €36.01 ($38.15), some 19% over the Dec. 22 quote.

In these treacherous markets, not all our recommendations played out that well. After they fell more than 20% in the first month or so of the year, we suggested that the beaten-down shares of meal-kit delivery company HelloFresh (HFG.Germany) were undervalued and looked like a Buy.

However, the slump early in the year proved to be just the beginning of the pandemic winner’s price decline.

Rising inflation, leading to higher costs for ingredients, fuel, and labor, as well as waning consumer confidence hit the company in the second half of the year. The stock has plunged more than 60% since our column ran, to a recent €20.74. With European economies unlikely to improve anytime soon, investors will need to tread carefully in 2023.

With 20 years under his belt as a value investor, Jonathan Edwards has learned to take advantage of the so-called disconnects, when a company’s stock price and fundamentals don’t align.

The small- and mid-cap companies he focuses on are a particularly good place to hunt for stocks trading below their intrinsic value. Smaller firms typically have fewer analysts covering them, often leading to less accurate stock assessments. Edwards has used such opportunities to help his $2.3 billion Invesco Small Cap Value fund (ticker: VSCAX) sit at the top of its category since he became senior portfolio manager in 2010.

Small Cap Value’s 10-year annualized return of 11.6% puts it in the top 2% of its small-cap peers, Morningstar notes, and well above the Russell 2000 Value benchmark’s 8.3% return. The fund also resides in the top 4% of its category for the past one, three, and five years. It has a lower-than-average expense ratio of 1.09%, while its A shares carry a 5.5% load.

One disconnect-turned-investment that has paid off is Northern Oil & Gas (NOG), now the fund’s No. 1 holding. In 2019, Edwards first bought shares of the nonoperating oil-and-gas-exploration company, which invests in the three main shale-oil regions. Its model is buying into projects for a percentage of revenue and paying a portion of the field costs.

He added meaningfully to the position when the pandemic struck in 2020, as oil prices fell sharply—dragging down the stock, even though Northern’s fundamentals remained the same. He snapped up more shares at around $5 each in late 2020 when hopes for Covid-19 vaccines were high. Edwards says the stock, now around $30, is still undervalued, as it trades at an estimated free-cash-flow yield above 20%. That’s above average versus its peers, assuming an average West Texas Intermediate price of $75 a barrel.

The process for Northern Oil exemplifies the intrinsic-value philosophy that many value managers follow, but Edwards believes Small Cap Value’s process stands out among its peers. The team has a proprietary database that Edwards has built over his career to help identify real-time opportunities; it contains the estimated intrinsic value for more than 2,000 companies. The team also uses a “win-risk scorecard” with 30 qualitative attributes that can identify factors that could lead to outperformance.

Another factor behind the fund’s success is finding companies in the lower part of their business cycle, especially when the market thinks such weakness is a new normal.

“That’s when we get really exciting opportunities,” Edwards, 51, says.

This disciplined and data-driven approach enables the fund manager to avoid short-term market noise that can scare other investors, such as an earnings miss or short-term operational issues. His typical three-to-five year outlook for holdings also helps the portfolio ride through market swings.

The Houston-based Edwards started at Invesco in 2001 as a corporate associate after earning his M.B.A. from McCombs School of Business at the University of Texas at Austin. He and his team, including portfolio manager Jonathan Mueller and three supporting analysts, also manage Invesco Value Opportunities (VVOAX), a $1.2 billion mid-cap fund using Small Cap Value’s same philosophy.

Like most funds, Small Cap Value has had its share of short-term weakness, such as in late 2018 when the Federal Reserve raised interest rates and China trade-war fears heightened, and during the 2020 pandemic swoon. But Edwards has used those times to buy names that have ultimately bolstered performance, as seen in this year’s 1.3% return versus the category’s 11.5% loss.

Take No. 8 holding Univar Solutions (UNVR), a global chemicals distributor. The fund bought the stock in spring 2020 at around $10. Edwards likes the company’s highly diversified customer base across multiple end markets. While the stock was caught up in the pandemic selloff in 2020, “we saw a solid long-term business that generates great free cash flow, and even generates good free cash flow during an economic downturn,” he says.

The stock now trades around $33, and Edwards expects further gains. Univar recently initiated a stock buyback program equal to 20% of its market capitalization and set an earnings target of $4.50 a share for full-year 2025, which he says seems attainable. The stock is trading at just seven times price-to-earnings on that target.

While the fund maintains a long-term approach, Edwards isn’t averse to going in and out of a stock if opportunities arise. During the fourth quarter of 2018, he first bought shares of the global electronics-manufacturing services firm Flex (FLEX) after a new, fiscally disciplined management team had just taken over. At the time, the stock was under $8; the fund later sold it profitably in the second half of 2020. Small Cap Value jumped back in around $17.50 in late 2021, as share prices faltered amid pandemic-induced supply-chain constraints.

The company is now the fund’s No. 9 holding, with shares trading around $21 a share. Flex stock trades at 7.5 times Edward’s 2024 earnings estimate, and he expects it to have a 9% free-cash-flow yield in 2024.

Looking ahead, there’s plenty of uncertainty going into 2023 that could bode well for a stockpicker seeking market disconnects, as both inflation and interest rates remain elevated and a possible recession looms.

“There’s no shortage of short-term concerns now,” Edwards says, “so it’s an opportunity-rich environment, which is great for us long-term investors.”