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Precise hedging tools needed during volatility
Geopolitics, inflation mean uncertain trading environment could extend into H2 2022
Tzu-Hsin Wu 23 Jul 2022

The first half of 2022 has been arduous for asset managers, especially those exposed to technology growth stocks and Asian exporters, all of which are being impacted by rising interest rates, ongoing Covid-19 disruptions and an uncertain global macro outlook. 

Key technology benchmark indices such as the Nasdaq 100 in the United States have led the decline, falling close to 30% in the first half of 2022, while the PHLX Semiconductor Sector declined by nearly 40%. Closer to home, tech-heavy indexes such as the Kosdaq Composite Index fell by around 30%.

In contrast, Taiwan proved more resilient with the TWSE Electronics Sector Index falling by just 24% over the same period. The globally-crucial semiconductor industry plays a huge part in its economy and in the development of new technologies, including electric vehicles, 5G, cloud computing and artificial intelligence.

Transporting technology components between factories and to end-markets is just as crucial for new technology development. With many borders in Asia only reopening in Q2 2022, many supply chains have had to grapple with logistical congestion and component shortages in the second half of this year. This is starting to be alleviated, but backlogs and domino effects arising from inflation, rising input costs, container shortages and lack of port capacity will continue to affect Asian exporters. In such an environment, investors targeting the global semiconductor and shipping sectors require the right hedging tools to ride out this storming sea of volatilities.

Rising demand for more precise hedging tools

Asian exchanges such as the Taiwan Futures Exchange (Taifex) are seeking to fill the void by launching products targeting the transport and semiconductor industries. Outside of Asia, Intercontinental Exchange listed a semiconductor index futures contract earlier in March; on the other hand, Taifex, in June, was the first in Asia to offer such a contract – Taiwan Semiconductor 30 Futures – focusing on Taiwanese semiconductor companies, such as Taiwan Semiconductor Manufacturing Company, MediaTek, and United Microelectronics Company. CME Group also plans to introduce its semiconductor futures later in the year.

Looking ahead, new carbon emission measurements and tools, including the International Maritime Organization’s Energy Efficiency Existing Ship Index and Carbon Intensity Indicator  and the European Union’s Emissions Trading Scheme, are set to come into force in 2023, posing new opportunities and challenges for the global transport sector. Taiwanese shipping companies such as Evergreen and Yang Ming are steadily transitioning to greener fleets. Becoming part of green supply chains will enable shipping companies to thrive in the near and medium-term, despite cyclical volatility and macro uncertainties. The targeted Shipping and Transportation Sector Futures recently launched by Taifex enables investors to capture this upside while managing risk.  

The ramifications of rising geopolitical tension and uncertainty from inflation mean the volatile trading environment could well extend into the second half of 2022. Investors need to be fast and precise in adjusting their portfolios to mitigate the uncertainties caused by shifts in sectoral policy or other black swan events.

The need to generate sustainable positive returns will continue to fuel market demand for flexible and precise risk management tools. As a result, demand for various derivatives, such as thematic or sector index futures, will continue to grow. Exchanges in Asia and the rest of the world will spare no effort in launching more competitive products to meet the needs of local and global investors.

Tzu-Hsin Wu is the chairman of the Taiwan Futures Exchange.

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