Belle Chang
Korea and Taiwan are traditionally often viewed as bellwethers for global trade outlook given their export-oriented characteristics and their critical roles in the global tech supply chain. Among APAC equity markets, Taiwan and Korea are the markets with the heaviest weights in Technology.
Korea’s and Taiwan’s equity markets historically moved closely together. However, in the past one year, Taiwan has outperformed Korea in equity significantly. Why are they behaving differently this time?
- The divergence between Tech and non-Tech sectors is one major explanation. FTSE Taiwan’s 70%+ weight in Tech is a lot more concentrated than FTSE Korea’s 50% weights in Tech plus Telecom. Non-tech sectors such as Industrials and Basical Materials were major draggers for Korea.
- Export data show a similar trend: Although Korea’s semi exports saw a significant recovery, overall exports have been dragged by non-tech sectors such as autos and petrochemical products.
- Within Tech, Taiwan is more concentrated in semiconductors and hardware supply chain which is a larger beneficiary from the AI-driven demand. Korea has a higher weight in consumer electronics and software.
Given the explosive AI-driven tech upcycle since 2023, the tech industries in the two economies have benefited as a result. Export growth recovered meaningfully – turning from negative to positive – for both Korea and Taiwan. Nevertheless, in the equity space, the two markets diverged. In the past twelve months, FTSE Taiwan saw a total return of 40%, but only 10% for FTSE Korea. To explain the divergence, we discuss three points in below:
FIGURE 1: FTSE TAIWAN VS FTSE KOREA INDEX TOTAL RETURN (IN USD TERMS)
Source: FTSE Russell and LSEG. Monthly data as of May 2024. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
(1) FTSE Taiwan is much more concentrated in Tech than FTSE Korea. Korea Tech rally was partially offset by non-Tech industries, e.g. Basic Materials and Industrials
Technology (Tech) accounted for 75.5% of the weight in the FTSE Taiwan index. Tech and Telecommunications, which includes Samsung Electronics (33.9%), together accounted for 49.2% of FTSE Korea. In this note, we include Korea Telecom as part of the discussion for Tech, given that Samsung Electronics is a big global player of consumer electronics and semiconductors, and it was only re-categorized from Tech to Telecom in Jun 2023.
FIGURE 2: FTSE TAIWAN VS FTSE KOREA INDUSTRY WEIGHTS
Source: FTSE Russell and LSEG. Data as of Jun 2024. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
In the past one year, FTSE Taiwan saw a total return of 40% with Tech up 89%. Taiwan’s tech firms have benefited from the AI boom given its critical position in the global AI supply chain.
On the other hand, FTSE Korea increased only 10% despite a 38% increase in Tech which was mainly driven by explosive demand for AI-related memory chips. Telecom was up only 9%, as Samsung Electronics was relatively late in the competition of HBM (High Bandwidth Memory) chips, a critical enabler for advanced AI development. Basic Materials (-29%) and Industrials (-15%) were the main detractors given that these industries tend to be more correlated to the global economic cycle.
FIGURE 3: FTSE KOREA INDEX TOTAL RETURN BY INDUSTRY (IN USD TERMS)
Source: FTSE Russell and LSEG. Data as of Jun 30, 2024. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
FIGURE 4: PAST 12M TOTAL RETURN CONTRIBUTION – FTSE TAIWAN VS FTSE KOREA
Source: FTSE Russell and LSEG. Data as of Jun 30, 2024. Past performance is no guarantee of future results. Please see the end for important legal disclosures.
(2) Export trends diverged too: Korea’s overall exports have been dragged by non-tech sectors such as autos and petrochemical products.
FIGURE 5: TAIWAN AND KOREA EXPORT GROWTH – TOTAL VS TECH PRODUCT EXPORTS
Source: FTSE Russell and LSEG. Korea data as of Jun 2024; Taiwan data as of May 2024. Please see the end for important legal disclosures.
Non-Tech industries were the main draggers for Korea equites. The trend was also evident in export data. Korea’s tech products saw a strong upward momentum across semi chips, display panels, mobiles and PCs. The main Korea memory chipmaker has commented that its advanced chips are already fully booked for 2024 and almost sold out for 2025.
As for non-tech products, the growth trends stay relatively flat. Korean autos witnessed strong export growth (especially to US) in 2023 given relatively attractive brand value propositions and pricing especially in the EV spaces, but the momentum has slowed in face of China EV competitions. Petro and petrochemical export growth turned positive this year, partially driven by higher commodity prices. However, it has been difficult for the industries to see meaningful recovery yet given a weaker global growth outlook and uncertainty around China recovery.
FIGURE 6: KOREA EXPORT GROWTH – TECH VS NON-TECH PRODUCT
Source: FTSE Russell and LSEG. Data as of Jun 2024. Please see the end for important legal disclosures.
On the other hand, the correlation between total exports and tech product exports in Taiwan remained high. Both semi and non-semi tech products remained resilient given explosive AI demand. Taiwan’s major semiconductor makers have provided positive forward guidance that orders for AI-related goods are expected to remain solid for the next one year.
In short, the divergence between Tech and non-Tech sectors is one major explanation. Stock performance and macro data suggest a similar story. Moreover, if we look into the compositions of the tech sectors in Taiwan and Korea, the difference would also explain the equity divergence between these two markets.
(3) Taiwan’s tech industry is more concentrated in semiconductors and hardware supply chain, but Korea has a higher weight in consumer electronics and software
If we break down into sub-sectors, FTSE Taiwan has more semiconductor focused players, which are a relatively larger beneficiary amid the AI boom compared to other Tech sub-sectors, such as software and digital services. FTSE Korea’s Semiconductors sub-sector has also outperformed significantly, but the weight is rather small at 9.8% vs Taiwan’s 58.3%. Computer Hardware is also a big beneficiary, but Korea only has 0.3% in Computer Hardware. In addition, in Korea, 2.8% are in Consumer Digital Services (e.g. NAVER and Kakao), and 33.9% is Samsung Electronics. These stocks have a higher revenue contribution from non-semi businesses, limiting the performance.
TABLE 1: TECH WEIGHTS - FTSE TAIWAN VS FTSE KOREA INDEX
Weight (% of total country index) |
FTSE Korea |
FTSE Taiwan |
|---|---|---|
| Technology | 15.1% | 75.5% |
| Computer Hardware | 0.3% | 7.0% |
| Computer Services | 0.7% | 0.0% |
| Consumer Digital Services | 2.8% | 0.0% |
| Electronic Components | 1.1% | 9.0% |
| Production Technology Equipment | 0.6% | 1.2% |
| Semiconductors | 9.8% | 58.3% |
| Telecommunications | 34.0% | - |
| Telecommunications Equipment | 33.9% | - |
| Telecommunications Services | 0.2% | - |
Source: FTSE Russell and LSEG. Data as of Jun 2024. Numbers may not add up due to rounding. Please see the end for important legal disclosures.
In summary
With AI-driven demand being a clear driver in the past 1-2 years, Taiwan’s high concentration in semiconductors and tech hardware allowed its equity market to outperform. The equity market appears to have become more of a bellwether for global AI demand, which is relatively independent from the global economic cycle.
On the other hand, Korea’s non-tech-industries have faced uncertainty around global growth outlook, dragging Korea’s overall performance. These have led to the divergence between Taiwan and Korea equity markets. Hence, for Korea equity to see a broader rally, industries that are more tied to the global economic cycle, such as Industrials, Basic Materials and Consumer Discretionary are key.
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