Taiwan is punching well above its market weight

HONG KONG, Aug 12 (Reuters Breakingviews): Taiwan's markets are not falling in line. The MSCI index comprised of Taiwanese stocks has dropped sharply in recent weeks but, unlike its peers in Japan and South Korea, has not come close to reversing its rise for 2024. Indeed, its year-to-date gains of nearly 28 per cent are more than double those of the S&P 500.
That is thanks in no small part to the $748 billion heavyweight Taiwan Semiconductor Manufacturing (TSMC), which after an almost 60 per cent rally this year accounts for just over half of the MSCI Taiwan and is larger than the entire economy. But it is hardly the only winner from demand for exposure to the AI-driven market frenzy. To name just one, shares in Hon Hai Precision Industry, weighted at 5 per cent in the index, are up 62 per cent this year.
This represents a triumph of tangible profits over indeterminate risks. A Cross-Strait Risk Index compiled by Goldman Sachs counting the number of articles that mention geopolitical tension between Taiwan and the mainland remains near all-time highs amid naval and airspace incursions by China's fleet.
That, combined with broader market ructions, has sent some foreign money running. Taiwan's foreign exchange regulator reported a $1.6 billion drop in reserves for July that it blamed, opens new tab largely on capital outflows. The recent global selloff likely encouraged more foreign traders to cash out.
Yet Taiwan's growing presence in two major benchmarks - the MSCI All World Index and MSCI Emerging Markets Index- suggests a structural rise. At 2 per cent and 19.4 per cent, respectively, those weightings are not only record highs for Taiwan but also brings them close to China's allocations of 2.6 per cent and 25.1 per cent.
That partly reflects limits on Chinese equities' weightings due to a lack of hedging instruments. But bankers say the rally in Taipei has served to reinvigorate global demand for exposure to listed Taiwanese companies.
That has helped to drive more than $6 billion worth of equity and convertible bond sales this year, according to Dealogic. The head of Asia Pacific banking at one Wall Street lender pointed to a range of buyers from global long only investors to insurers and hedge funds: "We are of course proud of our role, but it was not a struggle to sell these."
Taiwanese equities' ascent then is welcome news for deal-starved Asia-based bankers. Whether that strikes investors as odd given the small underlying size of its market appears not to matter - for now.