Growth of TSMC, Samsung, and SK Hynix in Taiwan and South Korean markets

As South Korea and Taiwan’s benchmark indexes soar to record highs this year on the strength of Asia’s trillion-dollar giants, there are growing concerns that their stock gains are becoming dangerously dependent on a handful of artificial intelligence winners.

South Korea’s Kospi index has soared more than 80% this year, hitting new highs one after another, while Taiwan’s Tyex has also been repeatedly setting new records as investors flock to semiconductor trading, the centerpiece of the AI ​​boom.

“In a nutshell, it’s clearly the AI ​​hardware theme that’s driving things,” Goldman Sachs strategist Tim Moe told CNBC.

He said Taiwan has “well over 80%” exposure to AI-related revenue sources, compared to about 60% for South Korea, as surging demand for memory chips and advanced semiconductors is driving an unprecedented revenue boom.

My concentration is amazing. According to UOB, Taiwan Semiconductor Manufacturing Company has a market capitalization of approximately NT$58 trillion ($1.85 trillion) and currently accounts for more than 40% of Taiwan’s benchmark TYEX index.

In South Korea, Samsung Electronics and SK Hynix combined sold 42.2% of the Kospi in May, a record high, according to Manulife Investment Management. Samsung Electronics’ market capitalization exceeded $1 trillion last week as investors continued to chase AI stocks.

This concentration has left both markets highly exposed to the global AI spending cycle. But it also means that rising index levels may say more about the earning power of a narrow group of exporting companies than about broader domestic strength.

Analysts warned that reliance on limited exporters could increase volatility and make the market vulnerable to shocks ranging from geopolitical tensions to a slowdown in data center spending.

“There are certainly risks to market concentration,” Goldman’s Mo said, pointing to vulnerabilities ranging from supply disruptions and political backlash against AI infrastructure to capital market stress and technological disruption from new chip designs.

One immediate risk comes from the AI ​​supply chain itself. Taiwan and South Korea are at the center of manufacturing ecosystems that rely on specialized chemicals, light-sensitive films known as photoresists, and gases, which can be affected during times of geopolitical tensions or disruptions to global shipping routes.

“It doesn’t take a genius to think that if something is not available and we have to stop production, inventories will adjust,” Mo said.

Additionally, Taiwan and South Korea are large energy importers, so even if AI demand boosts exports, rising oil prices due to tensions in the Middle East could undermine their purchasing power and international competitiveness.

Jamie Mills O’Brien, investment director at Aberdeen Investments, said both markets are “on the bad side of the terms of trade as large importers of energy prices,” especially at a time when oil prices have soared due to the Iran conflict.

Another threat is the level of expectation now built into valuations. The AI ​​frenzy has already given a huge boost to the profits of Asian tech companies, with Goldman predicting that South Korea’s profit growth could surge by as much as 300% this year.

“Korean and Taiwanese stock markets have always been more reflective of global demand, given that the majority of listed stocks are export companies rather than domestic demand,” said Mixo Das, head of Korea and Taiwan equity strategy at JPMorgan. “This remains the case, it’s just that global demand is now very focused on AI.”

While the spikes in Taiwan and South Korea’s stock benchmarks may look similar on the surface, Goldman’s Mo said they are increasingly divergent in how well they reflect the countries’ broader economies.

Despite being dominated by semiconductor manufacturers such as Samsung Electronics and SK Hynix, the South Korean market still occupies a relatively large swath of the country’s economy. Beyond semiconductors, investors have flooded into sectors related to shipbuilding, defense, power equipment and even “K-culture” trade, making the rise more reflective of South Korea’s broader industrial base.

“The market is actually deeper and broader than just superstar memory stocks, and there are more opportunities,” Mo said. He added that South Korea’s stock rally is better aligned with broader economic strength, including strong exports and a growing current account surplus.

In contrast, the Taiwanese market has become increasingly tied to TSMC and global semiconductor demand, and increasingly disconnected from the domestic economy, Mo said.

Some investors worry that the market is becoming too reliant on a single theme continuing indefinitely.

“We do see quite a bit of crowding around the AI ​​theme across global equities,” said JPMorgan’s Das. Depending on how broadly AI exposure is measured, “40% to 45% of the S&P 500 is AI-related,” with even higher levels in Taiwan and South Korea, he said.

Chi Wan, chief investment officer at UOB, warned that Taiwan’s growing dependence on TSMC could lead to long-term distortions in both the economy and the market.

“Some people say Taiwan is just a one-trick pony, but that’s exactly what TSMC is,” Wang said. “In the long run, it increases concentration risk for both the economy and the stock market.”

Taiwanese regulators recently eased limits on the amount of domestic funds that can be allocated to a single stock, a move widely seen as benefiting TSMC. Wang estimated that the changes could transfer $30 billion to $40 billion to chipmakers alone, potentially reinforcing the very concentration risks policymakers are trying to manage.

Other strategists argue that comparisons with other highly concentrated markets are overstated because semiconductors rely on a vast industrial ecosystem rather than a single commodity or product.

Still, history offers a warning. Denmark and Saudi Arabia, two markets that rely heavily on a single champion company, were among the world’s worst-performing stock markets at the end of last year.

The Danish market is novo nordiskMeanwhile, Saudi Arabia’s stock market, controlled by Saudi Aramco, struggled due to falling oil prices. Saudi stocks have since regained some ground following the recent recovery in oil prices.

The lesson for investors is that in bull markets, concentration can be self-reinforcing until sentiment changes. Florian Weidinger, chief executive of Santa Lucia Asset Management, warned that many global investors looking for diversification could be unknowingly doubling down on the same AI trade by buying both megacap US technology stocks and Asian benchmarks dominated by semiconductor giants.

“If that breaks down, many allocators will wake up with double risk,” he said.