Smart money piles into South Korean stocks as global AI bet looks for options to TSMC

Investors searching for ways to navigate the artificial intelligence story are turning their sights away from Taiwan and toward South Korea.

Federated Hermes, M&G Investments and Invesco Asset Management are underweight Taiwanese stocks and overweight Korean shares, saying positioning in the former has become crowded after a record-breaking rally. A push from Samsung Electronics and SK Hynix into high-bandwidth memory, cheaper valuations and outsize gains from Taiwan Semiconductor Manufacturing are making Korean shares a more appealing bet.

“We have an underweight allocation to Taiwan given more attractive opportunities in Korea,” said James Cook, head of investment specialists at Federated Hermes. The asset manager’s biggest stock position is in Samsung as it’s “priced only on its non-AI business which is mid-to-low cycle, and at a record discount to TSMC.”

Taiwan offers more direct exposure to the AI theme with index heavyweight TSMC, a key supplier for advanced chips used by Nvidia, but Korea isn’t far behind. SK Hynix provides most of the HBM chips for Nvidia’s AI processors, while Samsung – which has been lagging rivals this year – recently started ramping up HBM production.

Valuations also suggest a more alluring risk-reward for Korea at a time when investors are becoming more sceptical of stock prices for AI tech darlings.

The Taiex Index trades at almost 18 times forward earnings, nearly twice as expensive as the Kospi Index. After a 65 per cent year-to-date run, TSMC is trading at 20 times forward earnings versus 11.4 times for Samsung and 6.8 times for SK Hynix.

Recent fund flows are telling. Foreign funds have net sold US$7.2 billion worth of Taiwanese stocks so far this month amid a global chip sell-off, set for the most in two years. Meanwhile, Korean shares have seen US$1.6 billion of net inflows during the period.