Semiconductor Sector Correction Impacts TSMC Shares
On Monday, Taiwan Semiconductor Manufacturing Co. (TSMC) shares experienced their sharpest decline in nearly six months, following global sell-offs in artificial intelligence (AI)-related stocks last week.
The Taipei-listed shares plummeted by up to 6.6%, dragging down the benchmark Taiex index by as much as 4.4%. Hon Hai Precision Industry Co. suffered an even greater loss of 9.2%.
The sell-off stemmed from investors' concerns over news that DeepSeek's AI model could rival leading US developers. The market in Taiwan was closed for the Lunar New Year holiday during the initial sell-off last week.
Adding to investors' worries are tariff tensions. US President Donald Trump has ordered general tariffs of 25% on Canada and Mexico, and 10% on China, effective Tuesday. Trump has also threatened sectoral tariffs on chips, metals, and drugs in the coming months.
"TSMC share prices already reflect the ADR price movement," said Ken Wong, Asian equity portfolio specialist at Eastspring Investments. "We're currently evaluating our positions on a few companies with Mexico production exposure, as those will be impacted the most at the beginning."
Hon Hai announced last year that it was constructing the world's largest assembly site for servers powered by Nvidia Corp.'s GB200 chips in Mexico. Other Taiwanese partners to Nvidia include Inventec Corp., which also operates plants in Mexico. Inventec shares dropped by as much as 8.5% on Monday.
The Taiwanese dollar experienced its steepest intraday drop since 2015 on Monday morning, weakening alongside regional currencies amid a resurgent US dollar and Trump's tariff threats.
DeepSeek's cost-effective AI model has raised questions about whether companies need to spend heavily on developing AI technology. This could weigh on TSMC, a major supplier to Apple Inc. and Nvidia Corp.
"Fund managers may reassess their overall portfolio exposure to AI considering recent developments," said Gary Tan, a portfolio manager at Allspring Global Investments in Singapore. "In the near term, we think it will encourage emerging market investors to look outside tech hardware and countries like Taiwan and Korea for potential AI winners."
The pressure on TSMC, which accounts for 39% of the Taiwanese benchmark, could lead to further foreign outflows from the country. Overseas investors sold $1.26 billion of local shares in January.
Despite the concerns, bulls remain optimistic due to TSMC's advanced technology and reasonable valuation. Its stock is currently trading at around 18 times forward earnings, comparable to its five-year average.
Analysts have indicated continued strong demand for AI, which should support TSMC. While certain products may experience short-term headwinds, the long-term growth prospects for AI chips manufactured by TSMC remain strong.