Bolstering building blocks and silicon shields

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• Despite the United States’ passage of the Chips and Science Act to bolster competitiveness, US chipmakers still face a long road ahead in their aim to overtake rivals in Asia.
• Shipping activity passing through the waters near Taiwan’s southern port of Kaohsiung—a critical route for supply chains—resumed normal operations relatively quickly.
• The FTSE Taiwan Index appears to be attractively valued on a price-to-earnings basis relative to recent year-end figures.

The US White House announced this week that multiple firms, “spurred” by a new bipartisan bill, aimed at boosting US competitiveness, are planning for more than US$44 billion in new semiconductor manufacturing investments. The law is expected to boost US job growth and aid national security efforts. But US chipmakers still face a long road ahead in their aim to overtake rivals in Asia.

Taiwan’s dominance in semiconductor chipmaking began taking shape in the 1980s and has continued to grow in such an indispensable way that it has been referred to as a “silicon shield” for the island. Taiwan’s major semiconductor firms—which we believe to be currently undervalued in price-earnings (P/E) terms—can boast impressive economies of scale, with a high barrier of entry through cutting-edge processing capabilities and vast capital investments. This high-tech prowess has led Taiwan’s information technology sector holdings to comprise more than half its equity index. Secular trends such as fabless semiconductor manufacturing, the rise of artificial intelligence, electric vehicles and ongoing developments into “smart city” digital technologies as well as the metaverse should bode well for its tech industry. Consider also that the P/E ratio for the FTSE Taiwan Index is currently under 10x, compared to 12.5x at the end of 2021 and 17.9x at the end of 2020, suggesting to us that the sectors represented may also be attractively valued and significant risks are already priced in.¹

While many of the island’s top technology firms may be susceptible to pressure from China and the United States, as they derive significant revenue from and operate in both countries, they are also quite experienced in managing political risks. Near-term risks facing Taiwan tech firms include some cost pressures. For example, whether or not 5G component makers can pass on price hikes to customers.

As a key container ship operator, Taiwan’s southern port of Kaohsiung serves as a critical route for supply chains, with nearly half of the world’s container fleet passing through its surrounding waters. Despite the recent provocations, there was hope the region may return to relative calm as more than 30 commercial shippers were able to resume normal operations on August 8, according to ship-tracking data compiled by Bloomberg.

About 37% of all of Taiwan exports are China-bound, according to public data, and exports overall this year have risen. Furthermore, Taiwanese imports—of which nearly 19.7% come from China, also rose, up 9.5% in July from the same time last year.²

Perhaps bridging Taiwan’s technological and artistic talents is its flourishing augmented reality and virtual reality industry. Taiwanese developers and artists have won global accolades for designing virtual reality content. In May, Facebook parent Meta opened Asia’s first extended reality (XR) research hub in Taipei, allowing Taiwanese partners to play a stronger role in driving global innovation in metaverse applications and the further development of the digital economy.

Taiwan’s tech sector may face client concentration risk as well as threats from rising competition out of South Korea; however, we believe progress can stem from its encouraging business leadership and disciplined expansion plans.

With dominant positions in key global markets, we believe Taiwan remains well-positioned to punch well above its weight. Dedicated exposure to Taiwan can allow investors to make adjustments based on their convictions, rather than rely simply on the country weightings of broader emerging market indexes, for which China can account for nearly 35% and Taiwan 16.5%.³

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1. Source: Bloomberg, as of August 8, 2022. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges. Past performance is not an indicator or a guarantee of future results.

2. Source: Fortune, “Taiwan calls China’s bluff, says there’s ‘little chance’ of China imposing ‘stricter economic sanctions,” August 8, 2022.

3. Source: FTSE Russell Emerging Market Index, as of July 29, 2022. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.  Frank Russell Company is the source and owner of the trademarks, service marks and copyrights related to the Russell Indexes. Russell® is a trademark of Frank Russell Company.