Foreign investors stream into Taiwan as AI stocks beckon

Unimicron Technology

21/07/2023 05:26

By Georgina Lee and Faith Hung
       HONG KONG/TAIPEI, July 21 (Reuters) - Investors are
putting aside geopolitical tensions to pile in to Taiwan stocks,
with foreign inflows the biggest in years, thanks to soaring
artificial intelligence and chipmaking stocks.
    The wave of enthusiasm, which has also helped the tech-heavy
Nasdaq  .IXIC  to its best first half in 40 years, is running
hard as the market is dominated like no other by top firms all
along the computer hardware and software supply chains.
    Net foreign buying of $12 billion over the six months to
June is the biggest since the first half of 2008, and Taiwan's
benchmark index  .TWII  performance - it is up 20% in U.S.
dollar terms this year - is the best in Asia.
    The sparkling rally has scarcely been dented by Taiwan's
slowing economy, repeated shows of force by the Chinese
military, or while war in Ukraine highlights what is at stake
over the Taiwan Strait.
    Rather, investors say it's all the more sturdy as the
bogged-down conflict deters Chinese action and risks can be
managed by keeping positions liquid with one eye on a possibly
quick exit.
    And, market watchers, say the AI rally has further to go.
    "What we are seeing now is a tactical trade, which tends to
be based on a shorter-term investment horizon before the tech
sector's valuation peak," said Carlos Casanova, Asia senior
economist at Union Bancaire Privee. 
    "A potential escalation of events in the Taiwan Strait down
the line is less relevant for these investors," he said.
    China claims democratically governed Taiwan as its own
territory, a view strongly contested by the government in
Taipei. 
    China staged war games around Taiwan last August and again
in April, and it has regularly flown military aircraft across
the median line of the Taiwan Strait, which had previously
served as an unofficial barrier between the two.
    Famous investor Warren Buffett called geopolitical tensions
"a consideration" in his decision to last year sell most of a
stake in the giant Taiwan Semiconductor Manufacturing Co
 2330.TW  just a few months after buying it.
    "Nobody can say they are unconcerned about the military
threat from China," said one funds management veteran in Taiwan,
who spoke on condition of anonymity in order to talk freely.
    "However, we've been living with these cross-strait tensions
for a long time," he said. "The entire AI supply chain is in
Taiwan, and the entry barriers for any potential competitors are
quite high.
    "So that makes Taiwan’s AI supply chain very attractive for
foreign investors, and we believe their fund inflows will
continue to be strong throughout the year."
    
    'CLEAR WINNER'
    Artificial intelligence stocks have soared this year after
products such as ChatGPT demonstrated it can research and
prepare fully formed sentences, fuelling bets on its potential
to do all sorts of labour-saving and creative tasks.
    Investors say Taiwan's market is uniquely positioned to
benefit because it is exposed to the sector's growth from
applications to components, where demand is rebounding.
    "For the turnaround expected for semiconductor sector, the
clear winner in Asia is Taiwan and will likely remain so," said
Frank Benzimra, head of Asia equity strategy at Societe
Generale.  
    Hardware makers that will benefit include circuit board
maker Unimicron  3037.TW , network switch maker Accton
Technology  2345.TW  and contract electronics maker Hon Hai
Precision Industry  2317.TW , according to brokerage KGI Asia.
    Share prices for Wistron Corp  3231.TW  ,which focuses on
server assembling, laptop maker Quanta Computer  2382.TW ; and
chip design firms Alchip Technologies  3661.TW  and Global
Unichip  3443.TW  have all more than doubled this year.
    "We are at the start in the ongoing AI revolution," said
Andrew Swan, head of Asia equities excluding Japan at hedge fund
Man GLG, which has been adding exposure this year.
    Cathie Wood's Ark Investment Management has also been buying
TSMC in June, while Vanguard and PineBridge Investments Asia
also added exposure in Alchip last quarter, according to company
filings and media reports. 
    To be sure, not everyone is bullish and with exports and the
domestic economy pressured by faltering demand Goldman Sachs has
noted that further foreign flows might need earnings to pick up.
    There is also a presidential election set for January 2024
that is likely to draw tension and politics to the surface --
but investors are regarding worries as manageable.    
    "We don't see any imminent risks of the cross-strait
relations deteriorating into a war," said Clarence Chan, Asia
Pacific ex-Japan head of client solutions at $1.9 trillion BNY
Mellon Investment Management, which has added to Taiwan stocks.
    "The Chinese government is dealing with other more immediate
priorities such as youth unemployment, and economic recovery
from COVID, than Taiwan." 

 (Additional reporting by Summer Zhen in Hong Kong; Editing by
Kim Coghill)
 ((Georgina.Lee@thomsonreuters.com;))