Taiwan dethrones South Korea as world market leader amid widening AI trade

As equity investors enter the final stretch of a pivotal year that has propelled South Korea and Taiwan to the forefront of the global artificial intelligence (AI) trade, the latter is emerging as the stronger bet.

The TAIEX beat the KOSPI by about 23 percentage points last quarter, the widest margin since the turn of the century. Earnings upgrades also outpaced those for its South Korean peer for the first time since March last year. About 40 percent of the fund managers surveyed by Bank of America Corp last month said they were overweight Taiwan, versus 25 percent for South Korea.

Driving the optimism are Taiwan’s deeper linkages across the AI supply chain and a more upbeat earnings outlook.

A woman stands in front of an electronic stock board at the Taiwan Stock Exchange in Taipei on Tuesday.

Photo: CNA

“The distinction for us is not simply the amount of AI exposure, but the nature of the earnings supporting it,” M&G Investments (Singapore) Pte Ltd portfolio manager Vikas Pershad said. “Taiwan offers a broader and deeper opportunity set. Its earnings come from volume and that makes its earnings upgrades broader and stickier. [South] Korea’s earnings, in the near-term, are coming from price.”

Taiwan offers investors exposure across chip design and manufacturing, packaging, networking and servers, meaning it has more ways to benefit as AI spending broadens. Meanwhile, South Korea’s market leadership remains heavily concentrated in chipmakers Samsung Electronics Co and SK Hynix Inc, leaving it more vulnerable as doubts emerge over how much longer the current memory upcycle can run.

Up 72 percent this year, the TAIEX is the top performer among more than 90 equity indexes tracked by Bloomberg. The KOSPI is ranked second, with gains of about 63 percent. Taiwan’s lead comes as shares of KOSPI heavyweights Samsung and SK Hynix plunged between 19 percent and 33 percent last quarter.

Earnings estimates for the TAIEX rose about 19 percent in the last quarter, compared with an increase of about 15 percent for the KOSPI, data compiled by Bloomberg showed.

Societe Generale SA is “keeping a preference for Taiwan over Korean equities, given the diverging earnings growth trajectories,” strategists including Rajat Agarwal said.

In terms of valuations, the TAIEX is trading at about 18 times its one-year forward estimated earnings. The KOSPI trades at about 5.5 times, reflecting concern that the memory cycle might be approaching a peak, and in part the longstanding “Korea discount” that has kept the market cheap relative to global peers.

Still, when asked which market would benefit the most from the next phase of the AI cycle, 35 percent of the respondents in the Bank of America survey chose Taiwan. Just 5 percent picked South Korea. The TAIEX is delivering broader gains than its other tech-heavy peers, reflecting a wider range of investment opportunities. About 10 percent of the gauge’s stocks have at least doubled this year through Tuesday, compared with 4.1 percent for the KOSPI and 5.7 percent for Japan’s Nikkei 225.

“The next leg of upside for Taiwan stocks is likely to depend less on broad AI enthusiasm and more on local tech companies that remain exposed to genuine bottlenecks in the AI value chain,” Allspring Global Investments Holdings LLC portfolio manager Gary Tan (譚頌超) said.