As the political pressure from China on Taiwan grows, certain equity investors are shifting their focus from the globally renowned Taiwan Semiconductor Manufacturing Co (TSMC) to other potential opportunities. One such beneficiary of this transition is ASML Holding, a key supplier to TSMC.
Investment decisions are always influenced by a myriad of factors. However, geopolitical risks are increasingly taking center stage. Martin Currie’s Zehrid Osmani started reducing his investment in TSMC early the previous year and had completely divested by May. In a similar vein, Shelton Capital Management’s Bruce Kahn began selling his TSMC shares late last year and had fully liquidated his stake by January. Additionally, Sydney’s Plato Investment Management voiced concerns about the potential hazards facing the world’s leading foundry business.
However, it’s noteworthy that many of these investors, including Martin Currie and Plato, are now eyeing ASML Holding. This comes at a time when, based on Morgan Stanley’s research, TSMC was recognized as the most popular Asian stock among the 40 largest actively managed global equity funds as of July. With a 22% surge this year, TSMC’s stock performance has overshadowed ASML’s roughly 10% growth.
Osmani, overseeing assets worth US$3.2 billion, elucidated that TSMC, having most of its operations rooted in Taiwan, is inherently exposed to amplified geopolitical threats. Conversely, ASML is poised to capitalize on the technological splits arising from these geopolitical challenges.
The geopolitical landscape is indeed complex. Though a direct military confrontation isn’t widely anticipated, the strategic importance of Taiwan in the broader US-China relationship framework cannot be overlooked. For iconic investors like Warren Buffett, the potential for conflict overshadows the allure of TSMC’s dominant position in the chip industry.
ASML, headquartered in the Netherlands and serving major clients like Intel and Samsung Electronics, provides essential machinery for chip production. David Allen of Plato Investment accentuated ASML’s relatively insulated stance from geopolitical pressures. While acknowledging TSMC’s industry prowess, he noted the uncertainties surrounding its valuation if geopolitical tensions escalate.
Echoing a similar sentiment, Bruce Kahn highlighted the inadequacy of the current market valuation of TSMC in capturing the brewing geopolitical strains. He analogized the situation to the unanticipated Russian invasion of Ukraine, emphasizing the unpredictable nature of risks.
Interestingly, despite these concerns, the financial performance of both companies remains robust. ASML witnessed a drop in orders in the third quarter, making them increasingly dependent on Chinese revenue. However, TSMC’s sales forecast exceeded expectations. Both entities continue to be influenced by the ongoing US-China chip rivalry.
BlackRock’s assessment highlights Taiwan as the central point of contention in the already strained US-China relationship. This year, as of October 18, foreign investors have offloaded more Taiwanese stocks than they’ve acquired, negating the inflows from the year’s beginning.
TSMC is strategically broadening its global footprint to mitigate these risks. It has inked deals for new facilities in Germany, the US, and Japan, collaborating with various technology giants and securing substantial government subsidies. However, Zehrid Osmani speculates that TSMC’s global expansion might inflate unit costs despite the financial aids. On the flip side, ASML stands to gain, as TSMC’s growth abroad will likely boost the demand for ASML’s machinery, translating to enhanced profitability.
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