Sun, Dec 08, 2024 page12

• S Korea, Taiwan stock fortunes diverging widely

  ‘The structural theme of AI is likely to only get extended further and this means we could see another year of Taiwan outperformance,’ an analyst said

  • By Charlotte Yang and Betty Hou / Bloomberg
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  As South Korea descends into political chaos, its equity market risks falling further behind major tech rival Taiwan, which is basking in the glory of a global artificial intelligence (AI) boom.

  A near-30 percent surge in Taiwan’s stock benchmark this year, set to be the best since 2009, has already helped spur a historic divergence between Asia’s two tech-dominated markets. The nation’s market capitalization now exceeds South Korea’s by about US$950 billion as the world’s AI frontrunners from Nvidia Corp and Microsoft Corp to OpenAI all increasingly turn to Taiwanese firms for supply.

  Looking ahead to next year, while both export-oriented economies face the risk of higher tariffs by the incoming administration of US president-elect Donald Trump, many investors see Taiwan as less vulnerable given the reliance of US firms on its technology as well as its relatively better economic prospects.

  

  Three men walk near Taiwan Semiconductor Manufacturing Co’s Fab 18 at the Southern Taiwan Science Park in Tainan on Thursday.

  Photo: Ann Wang, Reuters

  Such optimism, and a recent pickup in inflows into local stocks, also augur well for the New Taiwan dollar, which has fared better than the South Korean won this year.

  “The structural theme of AI is likely to only get extended further and this means we could see another year of Taiwan outperformance,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. “The ‘Korea discount’ may linger for longer given the recent political debacle and the corporate governance reforms will have to be prioritized to get any closer to erasing this discount.”

  South Korean President Yoon Suk-yeol is fighting for his political life after his attempt to break an impasse in parliament by briefly imposing martial law backfired. The turmoil has cast a pall over the nation’s outlook and it also might affect the Corporate Value-Up program much touted by Yoon as a way to boost shareholder returns and eradicate the so-called “Korea discount,” a term referring to the long depressed valuations of the South’s equities.

  Down more than 8 percent this year, the KOSPI is one of the world’s worst-performing major equity indices. Its underperformance versus the TAIEX has deepened further this month.

  Taiwan’s equity-market outperformance has a lot to do with this year’s 80 percent surge in the shares of Taiwan Semiconductor Manufacturing Co (TSMC, 台積電), the world’s top advanced chipmaker, which accounts for 37 percent of the benchmark’s weighting.

  The company is the major supplier of Nvidia and Apple Inc’s most advanced chips.

  In contrast, shares of Samsung Electronics Co — South Korea’s most-valued company — have been the biggest drag on its local market. Samsung’s stock has slumped 31 percent in Seoul this year on concerns that the firm is missing out on the AI boom due to slow progress on technological breakthroughs and lingering management woes.

  Overall, Taiwan’s exposure to AI goes far beyond TSMC: More than 40 AI-related firms constitute about 73 percent of MSCI Taiwan’s index weighting, according to Goldman Sachs Group Inc analysts.

  At 33 percent, South Korea is a distant second in Asia and features SK Hynix Inc and Samsung Electronics only.

  Analysts’ average earnings per share estimate for MSCI Taiwan has risen more than 33 percent this year to a record high, while that for MSCI Korea has declined 5 percent since a peak in August, Bloomberg compiled data showed.

  “If you think of Nvidia’s AI server market and so on, Taiwan is heavily involved in that value chain,” said Yan Taw Boon (温演道), portfolio manager at Neuberger Berman Group LLC. “Conversely, [South] Korea has not performed as strongly, as they have very little involvement in this new booming environment.”

  While the higher tariffs threatened by Trump are a universal challenge, there are reasons some investors believe that Taiwan’s treatment might be more nuanced and less punishing.

  “One will recall that many Taiwanese exports were exempt from tariffs last time around, as they were key components of US tech supply chains,” JPMorgan Chase & Co analysts including Rajiv Batra wrote in a note. “This time is likely to be the same with TSMC seen as a major part of the global AI trade.”

  The Wall Street bank sees Taiwan relatively better positioned than South Korea in a trade war with the US.

  Another buffer for Taiwanese equities is the growing presence of local investors, especially when the global investment climate turns more capricious.

  “Taiwan retail investors’ home bias and the still interesting AI ramp-up theme should continue to drive participation in the stock market,” said Vivian Pai (白芳苹), fund manager at Fidelity International.

  Their increased awareness of long-term investing can help form strong consistent inflows into local stocks, Pai said.

  The NT dollar has weakened about 5 percent against the US currency this year while the won has fallen about 9 percent.

  “Both Taiwan and [South] Korea are exposed to tariffs, but Taiwan’s underlying economic fundamentals are more solid,” said Eddie Cheung (張敬勤), a strategist at Credit Agricole CIB. “This should persist in 2025.”
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