South Korea and Taiwan, Asia’s two tech-heavy stock markets, are on sharply divergent paths. As Taiwan basks in the glow of a global artificial intelligence (AI) boom, South Korea faces mounting challenges, exacerbated by political turmoil and a lagging equity market.
Taiwan’s stock benchmark, the Taiex, has surged nearly 30% this year, marking its best performance since 2009. This has widened the gap between Taiwan’s market capitalisation and South Korea’s to an extraordinary $950 billion. Taiwanese companies, particularly in the semiconductor industry, have emerged as vital players in the AI supply chain, attracting global tech giants like Nvidia Corp. and Microsoft Corp.
Taiwan’s AI dominance
A significant factor behind Taiwan’s market performance is the meteoric 80% rise in shares of Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s leading advanced chipmaker. TSMC, which supplies cutting-edge chips to Nvidia and Apple Inc., now accounts for 37% of Taiwan’s benchmark index weighting.
Beyond TSMC, Taiwan’s exposure to AI extends broadly. According to Goldman Sachs analysts, AI-related firms constitute about 73% of the MSCI Taiwan index, dwarfing Korea’s 33%. This breadth in AI-linked industries has bolstered Taiwan’s economic prospects and investor confidence.
In contrast, Samsung Electronics Co., South Korea’s largest company, has been a drag on its equity market, with shares slumping 31% this year. Samsung’s struggles, including slow progress in AI technology and internal management issues, have left it trailing behind rivals like TSMC.
South Korea’s political and economic woes
South Korea’s challenges extend beyond its equity market. Political instability under President Yoon Suk Yeol has cast a shadow over the nation’s economic outlook. Yoon’s controversial move to impose martial law briefly, in an attempt to resolve a parliamentary impasse, backfired, leaving his administration on shaky ground.
This turmoil threatens the implementation of the Corporate Value-Up program, a much-touted initiative to boost shareholder returns and tackle the “Korea Discount” — the term for the undervaluation of South Korean equities. The Kospi index has fallen over 8% this year, making it one of the worst-performing major equity markets globally.
Earnings divergence
The earnings outlook further underscores the stark contrast between the two nations. Analysts’ earnings-per-share estimates for MSCI Taiwan have surged more than 33% this year, reaching record highs. Conversely, estimates for MSCI Korea have declined by 5% since their peak in August, according to Bloomberg data.
“Taiwan is deeply embedded in the AI value chain, benefiting from Nvidia’s dominance in the AI server market,” noted Yan Taw Boon, a portfolio manager at Neuberger Berman. “Korea, on the other hand, has limited exposure to this booming environment.”
Impact of trump’s tariffs
Both export-oriented economies face challenges from higher tariffs, potentially imposed by incoming US President Donald Trump. However, many investors believe Taiwan is better positioned to weather a trade war.
During Trump’s previous administration, many Taiwanese exports were exempt from tariffs due to their importance in US tech supply chains. Analysts at JPMorgan Chase & Co. expect similar exemptions this time, particularly for TSMC, given its critical role in the global AI trade.
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Currency and investment trends
Taiwan has also benefited from a stronger currency and robust local investment. The Taiwan dollar has weakened by 5% against the US dollar this year, less than the Korean won’s 9% decline.
Taiwanese retail investors have played a significant role in supporting the stock market. “Local investors’ focus on long-term strategies and the AI growth story should sustain strong inflows into Taiwanese equities,” said Vivian Pai, fund manager at Fidelity International.
Looking ahead
As 2024 comes to a close, Taiwan’s equity market appears well-positioned for continued outperformance, buoyed by its dominant role in the AI sector and solid economic fundamentals. Meanwhile, South Korea faces a steeper climb, requiring corporate governance reforms and political stability to regain investor confidence.
“The Korea discount is likely to persist unless swift reforms are undertaken,” remarked Charu Chanana, chief investment strategist at Saxo Markets. “Meanwhile, Taiwan’s AI narrative and economic resilience could lead to another year of outperformance.”
In the battle of Asia’s tech giants, Taiwan has firmly taken the lead, leaving South Korea to grapple with internal and external headwinds.
