Taiwan Stocks Drop $4.9B as AI Investment Cools

Key Takeaway

• Foreign investors withdrew $4.9 billion from Taiwanese stocks, marking the largest outflow in six months amid AI hype cooling.
• Hedge funds increased investments in tech, especially semiconductors, with allocations reaching a five-year high after strong earnings from Alphabet and Microsoft.
• A.I. start-ups like Inflection AI and Stability AI face financial challenges despite significant investments, highlighting the high costs of developing generative A.I. technologies.

Taiwanese Stocks Experience Outflows

Taiwanese equities have seen a significant withdrawal of foreign investment, marking the largest monthly outflow in six months. Overseas investors pulled $4.9 billion from Taiwanese stocks as of the close of April, according to Bloomberg-compiled data. This retreat follows a period of robust gains, with the Taiex Index showing modest growth of less than 1% in April after surging by at least 6% in the preceding two months. The downturn is partly attributed to Taiwan Semiconductor Manufacturing Co. (TSMC), a major component of the Taiex, revising its chip market outlook downwards. Additionally, the prospect of the U.S. maintaining higher interest rates has raised questions about the sustainability of high valuations in the Taiwanese market.

David Chao, a strategist at Invesco Asset in Singapore, noted, "We’re seeing investors unwind or rebalance from some of the crowded trades out there such as AI, Taiwan, and the US to other more attractive places such as Chinese markets." He also highlighted the comparative expense of Taiwanese stocks, particularly against Korean equities, stating a preference for the latter based on valuation.

Hedge Funds Rally Behind Tech Stocks

Despite a broader slump in the S&P 500 Information Technology Index earlier in April, hedge funds have markedly increased their investments in technology stocks, driven by optimism in sector fundamentals. This surge in buying activity, the most significant since December 2022, was particularly focused on semiconductors, with hedge fund allocations in this sub-sector reaching a five-year high. The renewed confidence was bolstered by strong earnings reports from Alphabet Inc. and Microsoft Corp., which helped the tech sector rally by 5.1% last week. Seema Shah, Chief Global Strategist at Principal Asset Management, commented on the sector's long-term potential and the attractive valuation points presented by the recent market pullback.

A.I. Start-Ups Face Financial Challenges

The financial landscape for A.I. start-ups has become increasingly challenging, with several high-profile companies facing significant financial pressures. Inflection AI, Stability AI, and Anthropic have all encountered difficulties in balancing their ambitious A.I. development goals with their financial realities. Despite substantial investments, these companies are grappling with the high costs of developing generative A.I. technologies and the competitive landscape dominated by tech giants like Google, Microsoft, and Meta. The gap between the substantial expenses required to develop and maintain advanced A.I. systems and the revenues generated is a growing concern for the sector.

Street Views

• David Chao, Invesco Asset (Neutral on Taiwanese stocks):

  "We’re seeing investors unwind or rebalance from some of the crowded trades out there such as AI, Taiwan and the US to other more attractive places such as Chinese markets... Taiwanese stocks have been pricier than their Korean counterparts and I continue to prefer Korean equities purely on a valuation basis."

• Gokul Hariharan, JPMorgan Chase & Co. (Bullish on Asian and Taiwan tech stocks):

  "We believe that we are still in the early stages of a multi-year tech upcycle — so there is still quite a bit of room to go for EPS upward revisions in Asian and Taiwan tech stocks... As a result, we see the recent correction as more of a mid-cycle adjustment."