Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / Why Taiwan Semiconductor Is Emerging Markets Kingmaker
Transcript
- Lucas: Taiwan's stock market has been on an absolute tear in recent weeks, and it's not just about the broader rally. The iShares MSCI Taiwan ETF — ticker symbol E-W-T — is up five and a half percent in just the last five trading days. That puts it among the best-performing emerging market ETFs in the world right now. Luna: And that's against a pretty mixed backdrop. China ETFs like FXI are down almost two percent in the same stretch. Brazil's EWZ is off one percent. So what's driving Taiwan's outperformance? Lucas: It really comes down to one word: semiconductors. Taiwan is the manufacturing heart of the global chip industry, and right now the world cannot get enough chips — especially the high-end ones used in artificial intelligence data centers. TSMC, Taiwan Semiconductor Manufacturing Company, is the linchpin. They make chips for Apple, for NVIDIA, for AMD. If TSMC catches a cold, the whole tech world sneezes. Luna: And TSMC is not sneezing right now. They reported strong April revenues last week, up nearly thirty percent year-over-year. That kind of growth is hard to find anywhere in the developing world. Lucas: Exactly. And it's not just TSMC. The entire Taiwanese ecosystem benefits — chip design firms like MediaTek, packaging and testing companies, even the equipment suppliers. So when the semiconductor cycle turns up, Taiwan's entire market catches a tailwind. The EWT ETF is up more than thirty percent year to date, which is remarkable for any market, let alone an emerging one. Luna: But there's always the geopolitical risk. China considers Taiwan a renegade province, and the rhetoric has been heating up again. Doesn't that give investors pause? Lucas: It does, and it should. The 'Taiwan premium' in equity valuations partly reflects that risk. But here's the thing: the market has learned to live with the tension. TSMC's factories can't easily be moved. The know-how is concentrated in Taiwan. So investors are pricing in a kind of 'muddling through' scenario — constant friction, but no outright conflict. Luna: Still, the Strait of Hormuz headlines this week about Iran and the U.S. are a reminder that geopolitical shocks can come from anywhere. Taiwan is not immune to broader risk-off sentiment. Lucas: No market is. But Taiwan's semiconductor story has a structural demand driver that most EM markets lack. AI adoption is still in its early innings. The build-out of data centers requires massive amounts of silicon. That's a multi-year trend, not a quarter to quarter trade. Luna: And yet, if you look at valuations — the EWT trades at a price to earnings multiple in the high teens, which is not cheap for an emerging market. Some would say it's already pricing in a lot of the good news. Lucas: That's a fair concern. The P/E is definitely above the historical average for EM. But you could argue that Taiwan deserves a premium because its earnings are less cyclical now, more tied to secular growth. The question is whether the multiple can expand further, or whether it stays range-bound while earnings catch up. Luna: If walking through the economy with us has made something click — maybe today's chip story or the way we tied it to real ETF performance — then you should know these episodes stay ad-free because of listener support. People who find them useful sometimes throw a few bucks at buy me a coffee dot com slash fexingo. Lucas: It's a small way to keep the economics conversation going without any sponsors pushing their agenda. We appreciate anyone who chips in. Luna: Okay, back to Taiwan. So if an investor wants exposure to this semiconductor cycle, the EWT is the obvious vehicle. But are there other ways to play it? Lucas: Sure. You could buy TSMC's American depositary receipts directly — they trade under the symbol T-S-M. Or you could look at broader tech ETFs that have a big weighting in Taiwan. But the EWT is the most direct, pure-play way to get Taiwan exposure, and it's heavily weighted toward semiconductors. About sixty percent of the fund is in tech hardware and semiconductors. Luna: Sixty percent — that's concentrated. And with the U.S. dollar strengthening — the trade-weighted index hit one hundred nineteen point three on May fifteenth — that can be a headwind for EM returns for U.S.-based investors. Lucas: Absolutely. The strong dollar is a drag on EM returns, including Taiwan. But because Taiwan exports so much, the weaker new Taiwan dollar can actually boost earnings for export-oriented companies. So it cuts both ways. The net effect depends on whether the currency depreciation outweighs the equity gains. Luna: And we've seen that dynamic play out in other EM markets too. In our episode on Mexico, we talked about how the strong peso hurt nearshoring profits. But Taiwan seems to be managing it better. Lucas: Partly because the demand for chips is so inelastic — customers can't just switch suppliers because of a currency move. That gives Taiwanese companies pricing power. But there's another angle: the AI chip demand is also pulling in investment into Taiwan's semiconductor ecosystem. TSMC is building new fabs in the U.S. and Japan, but its most advanced nodes are still in Taiwan. That keeps the island at the center of the action. Luna: Let's talk about the risks again. The Strait of Hormuz headlines today — oil tanker tensions — could that spill over into Taiwan? Not directly, but any escalation in the Middle East could cause a risk-off move that hits all EM markets. Lucas: Sure, correlation in risk assets is high during panics. But Taiwan's fundamentals are domestically driven. The real risk is a direct confrontation with China, which we haven't seen. The U.S. and China are playing a long game of chicken, but markets have become somewhat desensitized to the rhetoric. Luna: There's also the news that Huawei plans new smartphone chips this fall, competing with NVIDIA and Apple. That could intensify the tech cold war and potentially benefit TSMC if Huawei needs advanced chips. Lucas: Interesting point. Huawei's chip ambitions might actually increase demand for foundry services, and TSMC is the go-to for high-end manufacturing. But it also raises questions about export controls. The U.S. has been tightening rules on semiconductor equipment exports to China. That could create a bifurcated market where Taiwan's advanced nodes become even more strategic. Luna: So in that scenario, Taiwan's competitive moat widens. But it also becomes a bigger geopolitical target. Lucas: Exactly. That's the paradox of Taiwan's market right now. The very thing that makes it so attractive — its irreplaceable role in the global chip supply chain — also makes it vulnerable. Investors have to decide whether they are comfortable with that risk-reward profile. Luna: For now, the momentum is clearly with Taiwan. The EWT's five-day return of five and a half percent is hard to ignore. But as we've seen with other EM rally stories, leadership can change quickly. Lucas: That's why I think the key is not to chase the short-term move, but to understand the structural forces. AI and semiconductor demand are real, multi-year trends. Taiwan is the primary beneficiary among EM markets. Whether that premium holds depends on earnings delivery and geopolitical stability. Luna: And for listeners who want to dig deeper, the semiconductor industry is complex. We'll link to some resources in the show notes. But for today, the big takeaway is: Taiwan is the emerging markets kingmaker because chips are the new oil. Lucas: And like oil, it's a double-edged sword. But for now, the chips are falling Taiwan's way.