What happened

Shares in electronic test and measurement tools company MKS Instruments (NASDAQ:MKSI) rose 70.3% in 2019, according to data provided by S&P Global Market Intelligence. The move is part of a general upswing in the fortunes of semiconductor capital equipment companies -- always an interesting area of investing in technology.

An illustration of semiconductors.

Image source: Getty Images.

In fact, you would be hard-pressed to find a company in the sector that didn't have a stellar 2019 in terms of stock performance.

MKSI Chart

MKSI data by YCharts

To understand what's going on with MKS Instruments and the others, you have to take a wider view and go back to what happened in the previous couple of years. As you can see in the chart below, a rotten 2018 was followed by a strong recovery in stock prices in 2019.

MKSI Chart

MKSI data by YCharts

The reason? Simply put, the market bought the stocks based on the idea that 2019 would mark a trough in the semiconductor industry leading to a recovery in the following years. It's the classical kind of trading pattern associated with highly cyclical stocks. Indeed, some of the smartest fund managers around have been buying into the idea.  

Given that MKS Instruments generates around half of its sales directly from the semiconductor market, and a large part of the rest from industries connected with it, it's likely to be a key beneficiary.

So what

The good news is that the idea of a recovery is being bolstered by positive remarks on the industry made both by the management of major companies like Siemens and by industry bodies.

For example, Japan is a major semiconductor manufacturer. The Semiconductor Equipment Industry Association of Japan (SEAJ) is forecasting an 8% increase in semiconductor manufacturing equipment made in Japan in 2020, and then a 12% increase in 2021.

Value of semiconductor manufacturing equipment made in Japan.

Data source: Semiconductor Equipment Association of Japan. Value of equipment.

Interestingly, the bounce in demand is seen as being led by "the expansion of applications including 5G, AI, IoT, and automatic driving" rather than being dependent "heavily on the volume of shipments of electronical equipment as before" according to the SEAJ report

Ultimately, if SEAJ is right and capital spending is set to bounce in Japan, and concomitantly globally, then MKS Instruments could be set for a couple of years of strong growth. 

Now what

There's no guarantee that the semiconductor industry will recover as many expect it will do in 2020, and these projections are always based on assumptions of global growth. In this context, it's worth noting that the semiconductor industry is one of the last sectors you would want to be invested in during a recession.

That said, the improvement in the sector's prospects is also a marker of the potential for stronger economic growth in 2020 -- the semiconductor sector has long been seen as an early indicator of the global economy. All told, the outlook is positive for MKS Instruments in 2020.