As South Korea descends into political turmoil, its stock market risks falling further behind its main technology rival, Taiwan, which is basking in the glory of a global artificial intelligence boom.
Taiwan's stock benchmark is on track to rise nearly 30% this year, the most since 2009, adding to an already historic divergence between Asia's two technology-driven markets. The world's AI frontrunners, from Nvidia Corp. to Microsoft Corp. to OpenAI, have all increasingly relied on Taiwanese companies for supplies, and the island's market capitalization now exceeds South Korea's by about $950 billion.
Looking ahead to next year, both countries' export-driven economies face the risk of increased tariffs from President-elect Donald Trump, but many investors are betting on U.S. companies' dependence on Taiwanese technology and a relatively strong economy. Considering the outlook, we believe that Taiwan is less vulnerable.
This optimistic outlook and the recent increase in capital inflows into domestic equities also bode well for the Taiwan dollar, which performed better than the South Korean won in 2024.
“AI structural themes are likely to expand further going forward, which means Taiwan could outperform again this year,” said Charu Chanana, chief investment strategist at Saxo Markets in Singapore. ” he said. “Given recent political debacles, the Korean discount may be long-term and corporate governance reforms will need to be prioritized to move any closer to eliminating this discount.”
South Korean President Yoon Seok-yeol is fighting for his political life after his attempt to break the deadlock in parliament by briefly imposing martial law backfired. The turmoil has cast a pall over the country's outlook, and the company's valuation program, which Mr. Yun has touted as a way to increase shareholder returns and eradicate the so-called “Korea discount,” which refers to long-term depressed corporate valuations, has cast a pall over the country's outlook. may also be affected. stocks in that country.
The Kospi has fallen more than 8% this year, making it one of the world's worst-performing major stock indexes. The company's underperformance against Taiwan's Taiex deepened this month.
TSMC rules
Taiwan's stock market outperformance has a lot to do with the 80% jump this year in the shares of Taiwan Semiconductor Manufacturing Co., the world's top advanced chip maker, which accounts for 37% of the benchmark weight. The company is a major supplier of cutting-edge chips to Nvidia and Apple Inc.
in contrast, samsung electronics The company, South Korea's most valuable company, is the biggest hurdle to the domestic market. Samsung shares have fallen 31% in Seoul this year amid concerns that the company is missing out on the AI boom due to slow technological innovation and lingering financial problems.
Overall, Taiwan's AI exposure far exceeds TSMC, with more than 40 AI companies accounting for approximately 73% of MSCI Taiwan's index weighting, according to analysts at Goldman Sachs Group. Masu. South Korea is a distant second in Asia at 33%, with only SK Hynix Inc. and Samsung Electronics participating.
MSCI Taiwan analysts' average earnings per share forecast rose more than 33% this year to a record high, while MSCI Korea's average forecast fell 5% from its August peak, according to data compiled by Bloomberg.
“Taiwan is deeply involved in that value chain, when you think about things like Nvidia's AI server market,” said Yang To Boon, a portfolio manager at Neuberger Berman. “South Korea, on the other hand, has played little part in this new booming environment and is therefore not performing as well.”
trump tariffs
Trump's threat of higher tariffs is a universal challenge, but there is reason for some investors to think Taiwan's treatment may be more nuanced and less punishing.
“We recall that many of Taiwan's exports were previously exempt from tariffs because they were critical components of the U.S. high-tech supply chain,” JPMorgan Chase analysts including Rajiv Batra said in a note. Deaf,” he said. “A similar situation is likely to occur this time around, with TSMC considered a major part of the global AI trade.”
Wall Street banks believe that Taiwan is in a relatively better position than South Korea in the trade war with the United States.
Another cushion for Taiwanese stocks is the growing presence of local investors, especially if the global investment environment becomes more volatile.
“Taiwanese retail investors' home bias and still-interesting AI launch theme will continue to drive stock market participation,” said Vivian Pai, a fund manager at Fidelity International. Their increased awareness of long-term investing could help form strong and consistent inflows into local stocks, she added.
The Taiwanese dollar has depreciated by about 5% against the US currency this year, and the Korean won has depreciated by about 9%.
“Taiwan and South Korea are both exposed to tariffs, but the underlying fundamentals of Taiwan's economy are more solid,” said Eddie Chan, a strategist at Credit Agricole CIB. “This should continue into 2025.”
CHOOSE LANGUAGE
SELECT LANGUAGE BELOW
