Chinese pressure on Taiwan is prompting some equity investors to buck the trend and exit Taiwan Semiconductor Manufacturing Co (TSMC, 台積電).
Martin Currie’s Zehrid Osmani began winding down his TSMC position early last year and was fully divested by May.
Shelton Capital Management’s Bruce Kahn started selling TSMC shares in October last year and eliminated his stake by January, while Sydney-based hedge fund Plato Investment Management said that it is “nervous” about the world’s largest foundry business.
Photo: Reuters
At the same time, Martin Currie and Plato are among those finding an alternative in ASML Holding NV, a TSMC supplier.
These are bold bets when considering TSMC was the most widely held Asian stock among the world’s 40 largest actively managed global equity funds as recently as July, a Morgan Stanley analysis showed.
The company’s stock is up 22 percent this year, outperforming ASML’s near 12 percent gain.
Because the bulk of TSMC’s operations are in Taiwan, it faces heightened geopolitical hazards, said Osmani, who helps oversee US$3.2 billion as head of Martin Currie’s global long-term unconstrained team.
ASML, on the other hand, benefits from the “technological fragmentation that the geopolitical risk brings,” he said.
While few fund managers expect military action, the situation remains high on their list of concerns, particularly because Taiwan is so important for US-China relations.
For some, including US investor Warren Buffett, the possibility of conflict overrides enthusiasm about TSMC’s market-dominating chip business.
By contrast, Netherlands-based ASML is relatively sheltered, with clients including Intel Corp and Samsung Electronics Co. The company provides lithography machines that are used in the production of chips.
David Allen, head of long-short strategies at Plato Investment, which manages A$11 billion (US$7 billion), avoids TSMC and said he is long on ASML.
TSMC is “an incredible company, but if things deteriorate from a sovereign perspective, who knows what’s the right valuation for the company,” Allen said.
Bruce Kahn, who runs the US$159 million Shelton Sustainable Equity fund, has sold TSMC.
There is too much geopolitical friction that is not reflected in the company’s market valuations, similar to how investors were not prepared for Russia’s invasion of Ukraine, he said.
“People don’t think anything is going to happen, but that’s the problem with risk, you don’t think anything is going to happen until it does,” Kahn said.
These stock bets are facing challenges in panning out as expected. According to its latest earnings release, ASML’s orders plunged in the third quarter and left the company more reliant on revenue from China.
Meanwhile, TSMC shares yesterday climbed as much as 1.1 percent after its quarterly sales outlook beat analysts’ estimates.
Both companies remain in the crosshairs of US-China chip tensions.
BlackRock Investment Institute’s geopolitical risk dashboard has a “high” risk rating for US-China relations, citing Taiwan as the “biggest flashpoint.”
As of Wednesday, foreign investors had sold more Taiwanese stocks this year than they had bought, erasing almost US$8 billion of inflows in January and February.
Outflows are not unique to Taiwan. Most “emerging markets” in Asia have seen a foreign exodus from equity markets this year, largely caused by a series of interest rate hikes by the US Federal Reserve.
TSMC has been building its presence abroad to counter risks from the escalating cross-strait risk.
TSMC’s diversification might drive “diseconomies of scale” in spite of the subsidies, as dispersed operations lead to higher unit costs, Osmani said.
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