Investing in Taiwan: profit from the rise of Asia’s Silicon Valley

On the face of it, Taiwan seems an unlikely location for a tech superpower as it is a small island with a population that is not even half that of Britain’s.

But “just as some small countries have managed to dominate a single sport, such as New Zealand in rugby, Taiwan and its companies have managed to dominate semiconductors and manufacturing”, says Isaac Thong, lead manager of the Aberdeen Asian Income Fund.

The demand for chips created by the AI boom has caused Taiwan’s exports to the US “to grow by more than 150% in the year to January, putting it on a par with China” as an export powerhouse, says Iain Barnes, chief investment officer of Netwealth. This has led to soaring share prices. Taiwan’s stock exchange is now one of the largest (by market capitalisation) in Asia.

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Taiwan’s tech miracle

Taiwan’s success “is essentially a story about what a huge investment in science and technology can do for a country over a period of time”, says Chetan Sehgal, the lead portfolio manager at Templeton Emerging Markets Investment Trust.

The initial impetus for Taiwan’s development came from the state, says Usha Haley, director of the centre for international business advancement at Wichita State University.

The country’s industrial policy promoted development “through export promotion policies, land reform and state-backed research, and development institutions such as the Industrial Technology Research Institute, all of which encouraged small and medium-sized companies to gain technical mastery”.

From that early start, Taiwan later benefited from two strokes of luck. The first was its physical proximity to China, which meant that when China started to open up its economy in the 1980s and 1990s, Taiwanese entrepreneurs, with their high level of education, ready access to capital and knowledge of Chinese, were able to serve as a bridge between the US and China, says Sehgal.

This involved setting up factories in China and Taiwanese companies providing “technological solutions for the problems that China’s growing manufacturing sector faced”.

That mainly involved components to start with, but over time this expanded to include sophisticated electronic chips.

The second stroke of luck was that at the same time as Taiwan was benefiting from China’s move towards a market economy, Japan had a major falling out with the US, says Chris Chan, a portfolio manager at EFG Asset Management.

The US was unhappy that Japan was using tariffs to give its then globally dominant semiconductor industry an unfair advantage. The resulting trade war gave Taiwanese firms, which enjoyed a much more open trade relationship with the US, a major advantage, allowing them “to build up Taiwan’s chip industry to the point where it became the major chip supplier to the rest of the world”.

The rapid growth of Taiwan’s technology sector has produced a virtuous cycle, where the physical proximity of a large number of technology firms has allowed the creation of a self-reinforcing tech “ecosystem” that Steve Brotman, founder of Alpha Partners, compares to Silicon Valley in the US.

Today, “you have these industrial parks where all the main tech firms are located together, so they can walk across the road to have a coffee with their main customer, or lunch with their main supplier”, says Chan.

This enables Taiwanese tech firms to work together and anticipate each other’s needs, helping keeping costs down so they can stay ahead of rivals in the rest of the world.

Taiwan still retains a culture and education system that values science and technology, and that is vital, says Chan. “It’s not like the US or Europe, where many of the top university students want to go into law or investment banking.”

Instead, those graduating from college in Taiwan want to work for companies such as TSMC, as the status acquired from working in technology or engineering “is still incredibly powerful, probably more than in any country I have been in”.

The secret of TSMC’s success

At the core of Taiwan’s technology sector is a single company, Taiwan Semiconductor Manufacturing Company (TSMC). It is so important to the Taiwanese stockmarket that it accounts for just over 40% of the Taiwan Stock Exchange (and just over half of indices such as MSCI Taiwan).

Lucy Smith, senior investment manager at Killik & Co, points out that this is more than the entire Magnificent Seven (Alphabet, Amazon, Apple, Tesla, Meta Platforms, Microsoft, and Nvidia), which account for 35% of the S&P 500. So a lot of the Taiwanese stockmarket “is driven primarily by just one company’s performance”.

TSMC’s dominance stems from the decision of Intel, which essentially created the industry under co-founder Gordon Moore, to “try to do everything itself, from chip design to fabrication, without any outside help”, says Thong. By contrast, TSMC decided that it would specialise in just one part of the process, the actual making of the chips. Thanks to its reputation for protecting the details of each of the chipmakers it works for, it built a reputation for large-scale reliable manufacturing, “attracting business from companies that wouldn’t work with Intel because they didn’t want to risk losing their intellectual property”.

The wisdom of TSMC’s focus on manufacturing has become apparent in recent years, as it has allowed it to make money from manufacturing the graphical processing units (GPUs) that have become so important to the present-day computer industry, says Brotman.

Intel viewed GPUs as a “sideshow, only of interest to those playing computer games”, but TSMC was happy to help Intel’s rivals fill the gap.

This proved wise, as demand for these specialised chips has boomed, initially from those mining bitcoin, then from AI, which needs powerful chips to work.

No company remains dominant forever, of course, and TSMC could end up going the way of Intel, either because of a shift in technology – towards quantum computing, for example – or because the economics of the chip industry itself changes, says Brotman.

During the dotcom era, many telecoms companies briefly became Wall Street darlings as they could make a lot of money from building fibre-optic cables, only for the fibre business then to become commoditised. Yet it’s hard to see computer chips being supplanted in the near future.

Brotman expects a “proliferation” of providers and manufactures of chips over the next ten to 20 years – plenty of time for TSMC to make lots of money.

Indeed, “TSMC’s technology position has only got stronger in the last few years”, says Abbas Barkhordar, a portfolio manager at the Schroder AsiaPacific Fund. No other company is spending close to the amount that TSMC is on research and development and the gap between TSMC and the only two firms that could plausibly be its rivals, Intel in the US and Samsung in Korea, “is only getting wider”.

Intel “is struggling in implementing its technological road map” and Samsung is cutting back its foundry business “as it hasn’t made Samsung as much money as it expected” it to.

It’s not all about the tech

Taiwan’s stockmarket and wider economy may be dominated by technology, but there are several other areas where it boasts globally competitive firms, says Alex Holmes, a regional director at the Economist Intelligence Unit.

Taiwan is particularly strong in consumer goods, ranging from relatively niche speciality goods, such as “bubble tea”, which is popular across Asia as well as in the US and Europe, to some world-leading companies in “activewear”.

Taiwan also has a flourishing precision machine-tools industry, which produces equipment that is widely used in automated factories in the US and Europe.

Just as Taiwan’s technology sector has been able to expand outside its small domestic market, so many Taiwanese firms in other sectors have pulled off a similar trick, says Sehgal.

“If you’re an avid cyclist you’ll know that the top two brands in the world are actually owned by Taiwanese companies: Giant and Merida.”

Taiwan also has a large medical drug industry, “with quite a few innovative biotechnology companies, some of which have come up with some interesting treatments that have been able to win approval from the Food and Drug Administration”, the US regulator.

Indeed, the country has a large (and growing) number of companies that have “strong brand equity and vertical integration”, agrees Haley. Such companies “reward patient, research-oriented investors rather than momentum traders swept up by narratives about a booming market”.

And although Asian companies may have a bad reputation for not being transparent, as well as for favouring insiders over investors, “Taiwan is unique in that the quality of its corporate governance is very high”, says Sehgal. Barkhordar agrees. In his view, Taiwanese firms “tick all the boxes that you’d like to see as an investor”.

They “have a great focus on capital allocation, a really good record of looking after minority and foreign shareholders and generally have good shareholder returns as well”.

The geopolitical risks are overstated

Any discussion of Taiwan has to reckon with the geopolitical risks associated with a potential conflict with China, which has always considered Taiwan to be a rogue province.

However, the chances of any direct action by Beijing within the next decade are “very low”, says Chan. “What’s happened to Russia in Ukraine will be at the forefront of the Chinese leadership’s minds”, especially given the fact that, as an island nation, Taiwan would logistically be much more difficult for China to attack than Ukraine was for Russia.

Even if China did manage to overcome the military challenges, the fallout of any attack could be disastrous for China’s economic strategy, says Chan. At the moment, China’s weak domestic economy and failing property market make it more dependent than ever on exports, most of which are carried by sea.

So if Japan, the Philippines and the US responded to an attack on Taiwan by blockading China, it could cut this sea-borne trade off at a stroke, as well as depriving it of key resources such as oil.

Invading Taiwan would almost certainly cause foreign investors to sell Chinese assets, which would cause Chinese renminbi to crash.

This in turn would be a major blow for the Chinese leadership’s dream of the renminbi replacing the dollar as the global reserve currency.

Thong agrees, seeing military action as very unlikely in the short run, with some sort of diplomatic agreement that preserves de facto Taiwanese autonomy the most probable outcome in the long term.

For one thing, a Chinese invasion would inevitably involve the destruction of the very chip plants that China needs to manufacture most of the electronic goods it produces.

Beijing is trying to develop its own chip industry to make it less dependent on Taiwan, but this is going to take some time to have an impact, “as you don’t just need machinery, tools and equipment, but also the people, know-how and experience”.

As a result, companies such as Huawei are still struggling to produce high-end chips at scale in an efficient enough manner to challenge Taiwan’s supremacy.

China isn’t, of course, the only country attempting to create its own chip-manufacturing capacity. TSMC is relocating some of its production to the US, in response to pressure from the Trump administration. But the lack of expertise and shortage of qualified engineers there means that “a TSMC plant in the US will have 30%-40% higher operating costs and will require 30%-40% higher capital spending costs than a comparable plant in Taiwan”, says Chan.

When TSMC and other Taiwanese firms do move factories outside of Taiwan to places such as Mexico and Thailand, “it tends to be the lower-end products, with the high-value work remaining in Taiwan”.

All this suggests that the clustering of high-end manufacturing that is so central to the success of Taiwan’s tech sector won’t be under threat in the foreseeable future.

In any case, the more Taiwanese firms relocate their production overseas, the lower their geopolitical risk, says Chan. “Investing in Taiwan is a less risky bet than it was perhaps five or ten years ago in terms of the physical concentration of factories actually in Taiwan.”

Investing in Taiwan: the best stocks to buy now

Perhaps the easiest way to invest in the Taiwanese stockmarket is through an exchange-traded fund, such as the iShares MSCI Taiwan UCITS ETF (LSE: ITWN).

This invests in the MSCI 20/35 Taiwan index, which covers 87 large- and medium-cap Taiwanese shares, accounting for around 85% of the market. It is structured so that the largest holding is capped at 35% of the index and all other holdings at 20%.

TSMC thus accounts for just over a third of the portfolio, compared with more than half of the MSCI Taiwan index. The average price/earnings ratio is 22.9, the yield 1.38% and the total expense ratio 0.74.

TSMC (Taipei: 2330) is the world leader in manufacturing computer chips. Thanks to the AI boom, it begins the year “in a position that few industrial companies ever reach: simultaneously capacity-constrained, margin-expanding and structurally indispensable”, says Saurav Sen of Gimme Credit.

But despite the boom, TSMC’s capital allocation is disciplined, with a return on capital employed of nearly 30%, despite attempts geographically to diversify production outside of Taiwan. Revenue has nearly tripled between 2020 and 2025, more than justifying the fact that the stock trades at 21 times expected 2027 earnings.

One company that has benefited from TSMC’s success is ASE Technology Holding Co (Taipei: 3711). ASE has developed a profitable niche packaging and testing the chips that come out of TSMC’s foundry.

Isaac Thong of Aberdeen Asian Income Fund likes the fact that the firm has a reputation for “timeliness as well as being trustworthy and producing high-quality work”. Between 2020 and 2025, ASE has grown its sales by around 40%, while increasing its earnings per share by a similar amount. The shares trade at 17.4 times expected 2027 earnings and offer a dividend yield of 2.42%.

Another Taiwanese tech company that has a good relationship with TSMC is MediaTek (Taipei: 2454). At the moment it specialises in producing the blueprints for the chips used in low-end smartphones.

This strategy has proved successful, with sales more than doubling between 2019 and 2024, alongside high returns on capital. Thong particularly likes the fact that MediaTek is now making big strides towards entering the high-end computer-chip market, especially in relation to chips used by data centres, which have a much better growth potential. The shares trades at 28.5 times projected 2026 earnings.

Delta Electronics’ (Taipei: 2308) has a leading position in power-management and thermal technologies, which will benefit from the explosion in demand for servers for artificial intelligence, which need to be cooled, reckons Morton Lo, chief analyst, APAC, at global broker FXTM.

Already, Delta’s revenue has grown by around 55% between 2019 and 2024, with earnings per share rising by 63% during the same period. While the stock trades at 63 times trailing earnings, strong growth means that this is expected to fall to a much more reasonable 36 times earnings in 2027.

One example of a thriving Taiwanese company that has achieved global success outside of the technology sector is Eclat Textile Company (Taipei: 1476). It is one of the world’s largest manufacturers of high-end sports clothes, making items for well-known brands such as Lululemon and Nike.

It has seen its revenue grow by just under 30% between 2019 and 2024, with earnings per share increasing by more than half during the same period. At the same time, it has been winning awards for sustainability. The stock trades at 17.8 times expected 2026 earnings, and offers a solid dividend yield of 3.8%.

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