TSMC, Samsung, SK Hynix’s growth on Taiwan and South Korean markets

As South Korea and Taiwan’s benchmark indexes have soared to record levels this year, boosted by Asia’s trillion-dollar giants, concerns have grown that these rallies have become dangerously dependent on a handful of AI winners.

South Korea’s Kospi index has surged more than 80% this year, hitting new highs after another, while Taiwan’s Taiex index has consistently posted new records as investors piled into the semiconductor trade at the center of the AI ​​boom.

“In a nutshell, it’s clearly the AI ​​hardware theme that’s driving things forward,” Goldman Sachs strategist Tim Moe told CNBC.

Taiwan has “more than 80 percent” exposure to AI-related revenue streams, while South Korea has around 60 percent, he said, as rising demand for memory chips and advanced semiconductors fuels an unprecedented earnings boom.

The concentration is amazing. Taiwan Semiconductor Manufacturing Company, which has a market capitalization of approximately 58 trillion Taiwan dollars ($1.85 trillion), currently accounts for more than 40% of Taiwan’s benchmark Taiex index, according to UOB.

In South Korea, Samsung Electronics and SK Hynix accounted for a record 42.2% of the Kospi in May, according to Manulife Investment Management. Samsung Electronics’ market cap surpassed $1 trillion last week as investors continued to track AI-related stocks.

Concentration has left both markets highly exposed to the global AI spending cycle. But this also means that gains at the index level may mean less about overall domestic strength than the earning power of a narrow group of exporters.

Analysts have warned that relying on a narrow group of exporters could increase volatility and leave markets vulnerable to shocks ranging from geopolitical tensions to a slowdown in data center spending.

“There’s certainly risk in market concentration,” Goldman’s Moe said, noting vulnerabilities ranging from supply disruptions to political backlash against artificial intelligence infrastructure, from capital market stress to technological disruptions resulting from new chip designs.

One of the immediate risks comes from the AI ​​supply chain itself. Taiwan and South Korea are at the heart of a manufacturing ecosystem that relies on specialty chemicals, light-sensitive films known as photoresists, and gases that can be affected during geopolitical tensions or disruptions to global shipping routes.

“If you can’t get them and so you have to stop your production, you don’t have to be a genius to think that stocks will recover,” Moe said.

Additionally, Taiwan and Korea are major energy importers; This means that even if AI demand boosts exports, high oil prices resulting from tensions in the Middle East could hurt purchasing powers and international competitiveness.

Jamie Mills O’Brien, investment director at Aberdeen Investments, said both markets were “on the wrong side of the terms of trade as major energy price importers”, especially at a time when oil prices have risen sharply due to the Iran conflict.

Another threat is the magnitude of expectations now embedded in valuations. The AI ​​craze has already pushed tech earnings in Asia sharply higher; Goldman estimates South Korea’s earnings growth could jump 300% this year.

“The Korean and Taiwanese equity markets have always been a reflection of global demand, given that the vast majority of listed stocks are exporters rather than domestic demand,” said Mixo Das, JPMorgan’s head of equity strategy for Korea and Taiwan. “This remains the case; only now global demand is concentrated on artificial intelligence.”

While Taiwan and South Korea’s emerging stock indicators may appear similar on the surface, Goldman’s Moe said the extent to which they reflect broader economies is increasingly divergent.

The South Korean market still covers a relatively large portion of the domestic economy, despite the dominance of chipmakers such as Samsung Electronics and SK Hynix. Beyond semiconductors, investors are also flocking to shipbuilding, defense, energy equipment and even sectors tied to the “K culture” trade, helping the rally better reflect Korea’s broader industrial base.

“The market is actually deeper and broader and has more opportunity than just superstar memorabilia stocks,” Moe said. He added that Korea’s equity gains are more in line with broader economic strength, including strong exports and rising current account surpluses.

The Taiwanese market, by contrast, has become increasingly reliant on TSMC and global semiconductor demand, making it increasingly disconnected from the local economy, Moe said.

Some investors also worry that markets are becoming overly reliant on a single theme that continues indefinitely.

“There’s definitely a significant intensity on the AI ​​theme across global equities,” JPMorgan’s Das said. “40% to 45% of the S&P 500 is AI-related,” depending on how widely AI exposure is measured, with even higher levels in Taiwan and Korea, he said.

Qi Wang, UOB’s chief investment officer, warned that Taiwan’s increasing dependence on TSMC could create long-term disruptions in both the economy and the market.

“Some people say Taiwan is just a one-trick pony. It’s just TSMC,” Wang said. “In the long run, it increases concentration risk for both the economy and the stock market.”

Taiwan’s regulators recently relaxed limits on how much domestic funds can be allocated to a single stock; This is a move widely seen to benefit TSMC. Wang estimated that this change could divert $30 billion to $40 billion to the chip maker alone, potentially reinforcing concentration risks that policymakers are trying to manage.

Other strategists argue that comparisons with other highly concentrated markets are overstated because semiconductors are based on sprawling industrial ecosystems rather than a single product or product.

Yet history offers cautionary tales. Denmark and Saudi Arabia, two markets that are heavily dependent on a single corporate champion It was among the world’s weakest performing stock markets at the end of last year.