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(Bloomberg) -- Investors searching for ways to navigate the artificial intelligence story are turning their sights away from Taiwan and toward South Korea.
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Federated Hermes, M&G Investments and Invesco Asset Management are underweight Taiwanese stocks and overweight Korean shares, saying positioning in the former has become crowded after a record-breaking rally. A push from Samsung Electronics Co. and SK Hynix Inc. into high-bandwidth memory, cheaper valuations and outsized gains from Taiwan Semiconductor Manufacturing Co. are making Korean shares a more appealing bet.
“We have an underweight allocation to Taiwan given more attractive opportunities in Korea,” said James Cook, head of investment specialists at Federated Hermes. The asset manager’s biggest stock position is in Samsung as it’s “priced only on its non-AI business which is mid-to-low cycle, and at a record discount to TSMC.”
Taiwan offers more direct exposure to the AI theme with index heavyweight TSMC, a key supplier for advanced chips used by Nvidia Corp., but Korea isn’t far behind. SK Hynix provides most of the HBM chips for Nvidia’s AI processors, while Samsung — which has been lagging rivals this year — recently started ramping up HBM production.
Valuations also suggest a more alluring risk-reward for Korea at a time when investors are becoming more skeptical of stock prices for AI tech darlings.
Read: AI Fever Cools, Sending Nasdaq 100 Into $1 Trillion Tailspin
The Taiex Index trades at almost 18 times forward earnings, nearly twice as expensive as the Kospi Index. After a 65% year-to-date run, TSMC is trading at 20 times forward earnings versus 11.4 times for Samsung and 6.8 times for SK Hynix.
Read: Janus Henderson Trims China Stock Holdings to Add Samsung Shares
Recent fund flows are telling. Foreign funds have net sold $7.2 billion worth of Taiwanese stocks so far this month amid a global chip selloff, set for the most in two years. Meanwhile, Korean shares have seen $1.6 billion of net inflows during the period.
For some fund managers’ mandates or index-tracking funds, the weighting of TSMC is already reaching a ceiling, meaning they will have to find smaller peers to get equivalent exposure.
Long-only funds have reduced TSMC positions in recent months, according to Morgan Stanley, causing the stock’s foreign ownership to drop to the lowest level since February.