(Bloomberg) — Investors looking for ways to navigate the artificial intelligence story are turning their eyes away from Taiwan and toward South Korea.
Bloomberg’s Most Read
Federated Hermes, M&G Investments and Invesco Asset Management are underweight Taiwanese stocks and overweight Korean stocks, saying positioning in the former has become crowded after a record rally. A push by Samsung Electronics Co. and SK Hynix Inc. into high-bandwidth memory, cheaper valuations and outsized earnings by Taiwan Semiconductor Manufacturing Co. are making Korean stocks a more attractive bet.
“We have an underweight allocation to Taiwan given the more attractive opportunities in Korea,” said James Cook, head of investment specialists at Federated Hermes. The asset manager’s largest equity position is in Samsung as it “only prices its non-AI businesses, which are 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 major supplier of advanced chips used by Nvidia Corp., but Korea isn’t far behind. SK Hynix supplies most of the HBM chips for Nvidia’s AI processors, while Samsung – which is lagging behind rivals this year – has recently started ramping up HBM production.
Valuations also suggest a more attractive risk-reward for Korea at a time when investors are becoming more skeptical of the stock prices of AI technology darlings.
Read: AI fever cools, sending Nasdaq 100 into $1 trillion nosedive
The Taiex Index trades at almost 18 times forward earnings, almost twice as expensive as the Kospi Index. After year-to-date performance of 65%, TSMC is trading at 20 times forward earnings, versus 11.4 times for Samsung and 6.8 times for SK Hynix.
Read: Janus Henderson cuts China holdings to add Samsung shares
Recent fund flows are revealing. Foreign funds have sold net shares worth $7.2 billion so far this month amid a global chip sell-off that has hit a two-year high. Meanwhile, Korean stocks recorded net inflows of $1.6 billion during the period.
For some fund manager mandates or index tracking funds, TSMC’s weighting is already capping, 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 foreign ownership of the stock to fall to its lowest level since February.
The memory chip rally is particularly positive for Korean stocks. Oversupply in previous years sowed “the seeds for shortages, price recovery and renewed profitability,” said John Pellegry, product director for Asian and emerging markets equities at Invesco. “This dynamic was driven by demand for AI and complemented the strong earnings growth outlook.”
Korea is also getting a boost from the “Corporate Enhancement Program”, with companies striving to increase shareholder returns and improve corporate governance.
Admittedly, the rotation from Taiwan to Korea may just be tactical, as Taiwanese tech stocks have robust long-term growth prospects given the island’s critical role in the global AI supply chain.
And Korea is not immune to broader technology sales. On Thursday, a global rout sent SK Hynix shares falling the most since November 2022 despite solid profits. Samsung also fell.
“When you buy Taiwan, you can’t avoid having a lot of TSMC,” said Keiko Kondo, head of multi-asset investing for Asia at Schroder Investment Management. But “AI isn’t just about Nvidia, and Taiwan isn’t just about TSMC either. So, if this theme is real, there are other names also in Taiwan that are benefiting from it.”
Still, some see Korea as a better place to tell the AI story for now.
The country offers “exposure to similar themes at much more appetizing valuations,” said Fabiana Fedeli, director of equity investments, multi-asset and sustainability at M&G. While Taiwan is home to some AI winners, “it has become a crowded position. And so you obviously want to make sure you don’t have all your eggs in one basket.”
(Updates with stock movements from Thursday.)
Bloomberg Businessweek Most Read
©2024 Bloomberg LP
