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For investors in chipmakers in Asia, earnings are no longer the only thing to watch.
Donald Trump’s comments about whether the US has a duty to defend Taiwan, casting doubt on the US stance towards the country in the event of Chinese aggression, sent shares of Taiwan Semiconductor Manufacturing Co down on Thursday despite strong second-quarter profits. The issue that Trump highlighted is not something that investors can easily brush aside.
The world’s largest contract chipmaker posted a net profit of T$247.8bn ($7.6bn), beating expectations for the June quarter on Thursday. It expects third-quarter sales to grow more than a third.
As a key supplier to Nvidia and Apple, the outlook for TSMC’s earnings remains robust. Global spending on artificial intelligence continues to increase, led by big tech companies and financial services groups. Companies in Taiwan have about a 90 per cent global market share in the production and assembly of AI servers. There are very few alternatives to TSMC in the global supply chain.
Yet rising political risks for TSMC and other companies operating in Taiwan cannot be ignored. China, which views Taiwan as its own territory, has been increasing threats and military exercises around the island. About 80-90 per cent of TSMC’s production capacity remains concentrated in Taiwan.
Republican presidential candidate Donald Trump’s comments that Taiwan “did take about 100 per cent of our chip business” and that it should pay the US for its defence means added uncertainty for TSMC stock, which hit a record high earlier this month.
Trump’s comment is a reference to the fact that, while South Korea and Japan have formal defence agreements with Washington, the US does not have such a treaty with Taiwan. A previous mutual defence treaty was terminated in 1979 when the US switched diplomatic recognition from Taipei to Beijing. That small reminder was enough to raise red flags for investors already jumpy over geopolitical risks related to Taiwan and the possibility of military conflict between the US and China.
Shares of TSMC are up three-quarters in the past year, reflecting justified optimism over its growth prospects and its dominant position in the sector. That position is unlikely to change anytime soon, nor should its buoyant outlook. But as US elections approach, politics will play as big a role as chip growth in determining the path for Asia’s semiconductor stocks in the coming quarters.
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