Foreign Investors Flock Back to Taiwanese Stocks Amid AI Optimism, Driving Record Highs

In May, foreign funds broke a two-month selling streak of Taiwanese equities, driven by renewed optimism surrounding artificial intelligence. Overseas investors purchased $2.7 billion worth of Taiwanese shares, reversing the trend of stock sales seen in March and April. Taiwan Semiconductor Manufacturing Co.’s (TSMC) warnings about continued weakness in consumer markets and a shift of funds to rival South Korea influenced the earlier sell-off.

Nvidia’s Bullish Forecast 

Global sentiment towards chip stocks has improved, spurred by another optimistic forecast from AI chipmaker Nvidia Corporation. 

Taiwan’s prominent role in the AI value chain is set to gain further momentum this week as tech giants convene on the island for its annual electronics showcase event.

Taiwan Semiconductor Manufacturing Co (TSMC), the world’s largest contract chipmaker, attributes much of Taiwan’s dominance in the global semiconductor industry to its operations. TSMC produces advanced processors for clients such as Apple and Nvidia, making it the leading manufacturer of Nvidia’s powerful AI processors.

“Earlier in the year, there was some cautious positioning on Taiwan, which has now eased alongside Nvidia’s optimism,” said Marvin Chen, a strategist for Bloomberg Intelligence. “Although valuations are becoming stretched, Taiwan remains Asia’s best proxy for the AI boom.”

Taiwan Leads Emerging Asian Markets in Foreign Inflows

Taiwan attracted the most foreign inflows in May among emerging Asian countries, excluding China. This influx helped propel its stock benchmark to a record high late last month, making the index one of the top performers in Asia this year.

The potential for continued foreign investment remains high, as foreign investors still own TSMC — the largest stock with a 32% index weighting — below the record 80% level seen in 2017.

A robust earnings outlook for Taiwanese companies also supports foreign investment in the market. The 12-month forward profit estimate for the Taiex Index has increased by more than 8% this year, compared to little change for the MSCI Asia Pacific Index.

However, a delay in Federal Reserve rate cuts could impact the tech rally, and any escalation in cross-strait tensions might deter foreign interest in Taiwan’s stock market.

“Strength in Nvidia and the underlying AI/server theme continues to support related stocks in Taiwan,” said Joshua Crabb, head of Asia Pacific equities at Robeco Hong Kong Ltd. Additionally, Taiwanese stocks remain attractive to foreign investors as they “are a lot cheaper than US counterparts,” he added.