South Korea's Kospi index and Taiwan's Taiex have reached record highs this year, largely driven by the booming demand for artificial intelligence (AI) technologies, particularly in the semiconductor sector. The Kospi has surged over 80%, while the Taiex has also seen significant gains as investors flock to AI-related stocks.
Goldman Sachs strategist Tim Moe highlighted that Taiwan is over 80% exposed to AI revenue, with South Korea at around 60%. This heavy reliance on a few key players, such as Taiwan Semiconductor Manufacturing Company (TSMC) and South Korea's Samsung Electronics and SK Hynix, raises concerns about market volatility.
TSMC alone accounts for over 40% of the Taiex, while Samsung and SK Hynix made up 42.2% of the Kospi in May. Analysts warn that this concentration could lead to increased market risks, especially if geopolitical tensions disrupt the supply chain or if there is a slowdown in data-center spending.
The markets are also vulnerable to rising energy prices, which could impact their competitiveness as both countries are significant energy importers. Furthermore, the high expectations for AI-related earnings growth, with estimates suggesting a 300% increase for South Korea this year, may not accurately reflect broader economic health.
While South Korea's market remains somewhat diversified, Taiwan's has become increasingly tied to TSMC and global semiconductor demand, distancing it from domestic economic conditions. The recent relaxation of investment limits on TSMC by Taiwanese regulators could exacerbate these concentration risks.
Historical examples from Denmark and Saudi Arabia illustrate the potential pitfalls of relying heavily on a single corporate champion, as market performance can suffer dramatically when conditions change. Investors are cautioned that they may inadvertently increase their exposure to the same AI trade across different markets, leading to compounded risks if the trend reverses