On a recent research trip to Taiwan, I observed a much more positive sentiment compared to previous visits. However, in terms of equity market performance, it hasn’t been a promising start to the year, and it remains to be seen whether 2025 will see the country continue its recent run of being the standout performer in EM equities.
Key talking points on my trip were:
Optimism from tech companies: AI growth, which has significantly increased revenue exposure for many companies, and a recovery in consumer electronics, particularly from Chinese smartphones and the beginning of a PC replacement cycle, are driving confidence in 2025.
Challenging market conditions: the MSCI Taiwan Index has underperformed this year, with valuations becoming disconnected from fundamentals. Although the market has corrected since the start of the year, we believe that challenges remain in the near term.
A shift in the AI hardware cycle: the pace of hardware invention is slowing and the focus is shifting to software, as well as cloud and IT services, where Taiwan’s dominance is less pronounced. Furthermore, earnings expectations have yet to adjust downwards.
Future unknowns: despite positive developments in demand and market structure, it is important to recognise that profitability in the global IT sector may have peaked in 2024. The industry should continue to grow but this growth could be less profitable than in the past.
In sum, the combination of stretched valuations, global tech sector weakness, and the maturing AI hardware cycle warrants a cautious investment approach. While the jury is still out on whether this period of consolidation will be cyclical or more structural in nature, we have moved to an underweight position in Taiwan tech and the IT sector more broadly.