As the quest for lucrative opportunities in the artificial intelligence (AI) sector intensifies, investors are increasingly moving their attention from Taiwan to South Korea. Prominent asset managers, including Federated Hermes, M&G Investments, and Invesco Asset Management, are rebalancing their portfolios by reducing exposure to Taiwanese stocks and increasing their investments in Korean equities. This shift follows a substantial rally in Taiwan’s markets, leading to overcrowded positions in the region.
James Cook, Head of Investment Specialists at Federated Hermes, emphasized, “We have opted for an underweight position in Taiwan due to more attractive opportunities in Korea.” Federated Hermes has notably invested heavily in Samsung, appreciating its valuation which is considered a bargain compared to Taiwan Semiconductor Manufacturing Co. (TSMC).
Although Taiwan provides direct exposure to the AI boom through TSMC, a leading supplier of advanced chips for Nvidia Corp., South Korea is making significant strides. SK Hynix is a major provider of high-bandwidth memory (HBM) chips crucial for Nvidia’s AI processors, while Samsung has recently increased its HBM production after lagging behind its competitors.
The valuation disparity further favors South Korea. The Taiex Index, which tracks Taiwanese stocks, trades at nearly 18 times forward earnings—almost double the valuation of the Kospi Index, which encompasses Korean shares. TSMC’s stock, having surged 65% year-to-date, is priced at 20 times forward earnings, whereas Samsung and SK Hynix are trading at significantly lower multiples of 11.4 and 6.8 times, respectively.
Recent fund flow data highlights this trend. Taiwanese stocks have experienced a net outflow of $7.2 billion this month due to a global chip selloff, marking the highest outflow in two years. In contrast, Korean equities have seen $1.6 billion in net inflows during the same period.
As TSMC’s stock reaches a high ceiling for many fund managers, there is a noticeable shift towards smaller players in the AI space. Long-only funds have also been reducing their TSMC holdings, leading to a decrease in foreign ownership to its lowest level since February.
The rebound in memory chip prices has further bolstered Korean stocks. John Pellegry, Product Director for Asian and Emerging Market Equities at Invesco, noted that the previous supply glut has created conditions for shortages and price recovery, enhanced by AI demand and strong earnings growth prospects.
South Korea benefits from the “Corporate Value-up Program,” which encourages companies to enhance shareholder returns and improve corporate governance. Despite these advantages, the transition from Taiwan to Korea might be a tactical move, as Taiwan’s tech sector continues to play a pivotal role in the global AI supply chain.
However, South Korean stocks are not immune to broader market fluctuations. Recent global market declines have caused significant drops in SK Hynix and Samsung shares, despite solid earnings reports.
Keiko Kondo, Head of Multi-Asset Investments for Asia at Schroder Investment Management, acknowledged the dominance of TSMC in Taiwan’s tech sector but pointed out that the AI landscape extends beyond Nvidia and TSMC. “AI is not just about Nvidia, and Taiwan is not just about TSMC,” she remarked.
Fabiana Fedeli, Chief Investment Officer for Equities, Multi-Asset, and Sustainability at M&G, concurred, highlighting South Korea’s more attractive valuations. “While Taiwan has its AI champions, it has become a crowded position. Diversifying into Korea allows for exposure to similar themes without putting all investment in one basket.”
