As South Korea descends into political chaos, its equity market risks falling behind big tech rival Taiwan, which is basking in the glory of a global artificial intelligence boom.
A nearly 30 percent gain in Taiwan’s stock benchmark this year, the best since 2009, has already helped widen the historic gap between Asia’s two tech-dominated markets. The island’s market capitalization has now surpassed South Korea’s roughly $950 billion as world AI leader Nvidia Corp. and Microsoft Corp. from OpenAI are all increasingly turning to Taiwanese firms for supply.
Looking ahead to next year, while both export-oriented economies face the threat of higher tariffs from incoming US President Donald Trump, many investors see Taiwan as dependent on American firms for its technology, as well as its Considered less vulnerable due to relatively better economic prospects.
Such optimism, and the recent surge in inflows into local stocks, also bodes well for the Taiwan dollar, which has outperformed the Korean won in 2024.
“The structural theme of AI is likely to expand further, and that means we could see another year of Taiwan’s outperformance,” said Charu Channa, chief investment strategist at Saxo Markets in Singapore. “Given the recent political debacle, the Korean concession may remain in place for much longer, and corporate governance reforms must be prioritized to get closer to ending the concession.”
South Korean President Yoon Suk-yeol is fighting for his political life after he tried to break a deadlock by briefly imposing martial law in parliament. The turmoil has affected the country’s outlook and could also affect a corporate value-up program that Yoon described as a way to boost shareholder returns and end the so-called Korea discount, a term long Refers to depressed prices. country’s equity.
Down more than 8% this year, the Kospi is one of the world’s worst-performing major equity indexes. Its underperformance against Taiwan’s Taiex deepened this month.
TSMC Rules
Taiwan’s equity market’s outperformance has a lot to do with an 80% rise this year in shares of Taiwan Semiconductor Manufacturing Co., the world’s top chipmaker, which accounts for 37% of the benchmark’s weight. The company Nvidia and Apple Inc. is a major supplier of state-of-the-art chips.
In contrast, shares of Samsung Electronics The company – South Korea’s most valuable company – has been the biggest draw in its domestic market. Samsung’s stock has fallen 31 percent in Seoul this year on concerns that the firm is missing out on the AI boom due to slow progress on technological advances and management problems.
Overall, Taiwan’s exposure to AI far outstrips TSMC: More than 40 AI-related firms make up about 73% of the MSCI Taiwan index’s weight, according to Goldman Sachs Group analysts. With 33%, Korea ranks second in Asia behind only SK Hynix Inc. and features Samsung Electronics.
Average analyst earnings-per-share estimates for MSCI Taiwan have risen more than 33% this year to a record high, while MSCI Korea has fallen 5% since a peak in August, compiled by Bloomberg. The data shows.
“If you think about Nvidia’s AI server market and so on, Taiwan is very involved in that value chain,” said Yan Taobon, a portfolio manager at Neuberger Berman. “In contrast, Korea has not performed as strongly because it has little involvement in this new boom environment.”
Trump Tariffs
While Trump’s threat of higher tariffs is a global challenge, some investors believe there are reasons for Taiwan’s treatment to be more delicate and less punitive.
“One may recall that many of Taiwan’s exports were exempted from tariffs last time because they were key components of US tech supply chains,” JPMorgan Chase & Co. analysts, including Rajiv Batra, wrote in a note. “The same is likely to happen with TSMC at the moment, which is seen as a major part of the global AI trade.”
The Wall Street bank sees Taiwan in a relatively better position than Korea in a trade war with the US.
Another buffer for Taiwanese equities is the growing presence of local investors, especially as the global investment climate becomes more attractive.
“The home bias of Taiwanese retail investors and the still interesting AI ramp-up theme should drive stock market participation,” said Vivian Pai, fund manager at Fidelity International. He added that their increased awareness of long-term investing can help generate strong consistent inflows into local stocks.
The Taiwan dollar has weakened about 5 percent against the U.S. currency this year, while the Korean won has depreciated about 9 percent.
“Both Taiwan and Korea are exposed to tariffs but Taiwan’s underlying economic fundamentals are more solid,” said Eddie Cheung, a strategist at Credit Agricole CIB. “It should hold in 2025.”