Nervous investors shy away from TSMC on geopolitical risk

Intensifying Chinese pressure on Taiwan is prompting some equity investors to buck the trend and exit the world's largest contract chip maker, Taiwan Semiconductor Manufacturing Co (TSMC).

Martin Currie’s Zehrid Osmani began winding down his TSMC position early last year and was fully divested by May. Shelton Capital Management’s Bruce Kahn started selling TSMC shares last October and eliminated his stake by January, while Sydney-based hedge fund Plato Investment Management said it’s “nervous” about the world’s biggest foundry business.

At the same time, Martin Currie and Plato are among those finding an alternative in ASML Holding, a crucial TSMC supplier.

These are bold bets when considering TSMC was the most widely held Asian stock among the world’s 40 largest actively managed global equity funds as recently as July, according to Morgan Stanley’s analysis. The company’s stock is up 22 per cent this year, outperforming ASML’s near 10 per cent gain.

Because the bulk of TSMC’s operations are in Taiwan, it faces heightened geopolitical hazards, said Osmani, who helps oversee US$3.2 billion as head of Martin Currie’s global long-term unconstrained team. ASML, on the other hand, benefits from the “technological fragmentation that the geopolitical risk brings,” he said.

While few fund managers expect military action, the situation remains high on their list of concerns, particularly because Taiwan is so important for US-China relations. For some, including famed US investor Warren Buffett, the possibility of conflict overrides enthusiasm about TSMC’s market-dominating chip business.

By contrast, Netherlands-based ASML is relatively sheltered, with clients including Intel and Samsung Electronics. The company provides lithography machines that are used in the production of chips.