Renewed tensions between China and Taiwan are unwelcome in every sense, but so far they have failed to halt the punchy market rally of recent weeks. The S&P 500 index made a gain of around 9 per cent in the month to 15 August, while stragglers of the past year such as UK small and mid-caps have had their own healthy rebound. However, the recent geopolitical strife in Asia does highlight the vulnerabilities of one major overseas company and its role as an important dividing line for funds in the region.
Taiwan was the second-biggest country weighting in the widely followed MSCI Emerging Markets and MSCI AC Asia ex Japan indices at the end of July, and much of that is down to the presence of Taiwan Semiconductor Manufacturing Company (TAI:2330). Having weathered the US/China trade war and then racked up huge share price gains in the earlier part of the pandemic the company has risen and become the biggest constituent of both indices, making up 6.5 per cent of the MSCI Emerging Markets index and 7.3 per cent of MSCI AC Asia ex Japan index at the end of July.
But Taiwan Semiconductor Manufacturing has run into all manner of problems more recently. Its shares have fallen markedly this year as markets have turned, the company warned of inflation denting profitability in July, and most recently it looks pretty vulnerable if China tensions ratchet up once more.
As an individual holding it’s certainly one to weigh up – whether you worry about the problems outlined above or view the company as a sold-off name with plenty still going for it. But Taiwan Semiconductor Manufacturing's woes also matter to those focusing on the region via funds.
That’s partly because its prominent position in indices means it will have a decent influence on the performance of conventional emerging market and Asia trackers. But what’s more, some stockpickers have loaded up on its shares fairly heavily. Templeton Emerging Markets (TEM) had a chunky 10.8 per cent position at the end of June, while BlackRock Asia (GB00B7VS8S56) had a 9.4 per cent weighting to the stock at the end of July. To give some other examples, at the end of June Schroder Asian Total Return (ATR) was exposed to the tune of 8.9 per cent while Asia Dragon (DGN) and FTF Martin Currie Emerging Markets (GB00BVZ6TY69) each had 8.4 per cent positions.
As with the Faang technology stocks in the US, names such as Taiwan Semiconductor Manufacturing can make up such a big part of indices that active managers have to take especially big positions to express any conviction – or make a similar big call if they decide to have a smaller position than the index or even no investment at all. Taiwan Semiconductor Manufacturing therefore becomes another dividing line between different funds in the region, and could help to decide the winners and losers in both the short and long term. While it won’t matter as much as an Asia or emerging market manager’s stance on China, it will affect returns.
It’s finally worth noting that Taiwan Semiconductor Manufacturing's fate can also matter to funds with a broader remit, given that it crops up in some global funds. To give one example in the environmental, social and governance realm, it made up 8.2 per cent of Baillie Gifford Positive Change (GB00BYVGKV59) at the end of June.
