‘Sell TSMC, buy ASML’ gains traction as China-Taiwan risks grow

BUSINESS / Companies

‘Sell TSMC, buy ASML’ gains traction as China-Taiwan risks grow

The Taiwan Semiconductor Manufacturing Co. logo atop a building at the Hsinchu Science Park in Hsinchu, Taiwan | Bloomberg

By Sheryl Tian Tong Lee, Ishika Mookerjee and Bei Hu
Bloomberg

Oct 20, 2023

Intensifying Chinese pressure on Taiwan is prompting some equity investors to buck the trend and exit Taiwan Semiconductor Manufacturing Co.

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 largest foundry business.

At the same time, Martin Currie and Plato are among those finding an alternative in ASML, 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% this year, outperforming ASML’s near 12% gain.

Because the bulk of TSMC’s operations are in Taiwan, it faces heightened geopolitical hazards, said Osmani, who helps oversee $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 U.S.-China relations. For some, including famed U.S. 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.

David Allen, head of long-short strategies at Plato Investment, which manages 11 billion Australian dollars ($7 billion), avoids TSMC and said he’s long ASML.

TSMC is “an incredible company, but if things deteriorate from a sovereign perspective, who knows what’s the right valuation for the company,” Allen said.

Bruce Kahn, who runs the $159 million Shelton Sustainable Equity fund, has sold TSMC. There’s too much geopolitical friction that isn’t currently reflected in the company’s market valuations, similar to how investors weren’t prepared for Russia’s invasion of Ukraine, he said.

“People don’t think anything is going to happen,” Kahn said. “But that’s the problem with risk, you don’t think anything is going to happen until it does.”

These stock bets are facing challenges in panning out as expected. According to its latest earnings release, ASML’s orders plunged in the third quarter and left the company more reliant on revenue from China. Meanwhile, TSMC shares climbed 1.8% Friday after its quarterly sales outlook exceeded analysts’ estimates.

And both companies remain in the cross-hairs of U.S.-China chip tensions. BlackRock Investment Institute’s geopolitical risk dashboard has a “high” risk rating for U.S.-China relations, citing Taiwan...