Taiwan Stock Exchange tumbles after chip exuberance and renewed Covid fears

“There are bad market days, then there is the 8%-plus free fall that gripped Taiwan stocks”, says Barbara Kollmeyer in Barron’s. Taiwanese shares suffered a brutal sell-off on 12 May as worries about global inflation and overheated speculation on semiconductor firms collided with fears about rising local Covid-19 cases. The market later recouped some of its losses, but the early-day plunge was the worst that the tech-heavy Taiex index has suffered since 2000 when the dotcom bubble imploded.

Betting it all on chips

Investors had been feeling cheerful, say Lauly Li and Cheng Ting-Fang in Nikkei Asia. The global semiconductor shortage has driven surging interest in Taiwanese chip makers. Industry leader Taiwan Semiconductor Manufacturing Company (TSMC) makes up more than 30% of the local stockmarket, while smartphone chip designer MediaTek is the third-biggest firm. Taiwan’s highly successful campaign against Covid-19 added to the optimism. Local retail investors have been diving in; the island has 11.24 million share-trading accounts, equivalent to almost half of the local population. Their exuberance left the market richly priced: price-to-book value has risen from 1.64 to 2.4 over the past 12 months.

This was a “classic story of exuberance and leverage”, adds Mike Bird in The Wall Street Journal. The Taiex had soared 48% over the past year and increasing numbers of investors have been borrowing to invest. When share prices fell, it triggered margin calls, forcing investors to sell even more in order to raise cash. Such leveraged equity purchases always heighten volatility and they are on the rise elsewhere, particularly in the US, India and Korea. Taiwan – now 8% off its April highs – won’t be the last market to find that soaring margin debt carries “the risk of messy sell-offs”.

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Covid-19 concerns

The spike in Covid-19 cases prompted Taiwanese authorities to impose their strictest restrictions since the pandemic began, although these stop short of a full lockdown. Other parts of Asia are also suffering from renewed outbreaks. Singapore announced tighter measures last Friday after finding several clusters. The Straits Times index responded by falling 2.2%, its worst daily performance in 11 months, says Reuters.

The situation in Southeast Asia is concerning, says Amy Gunia in Time. The region fared “relatively well” last year, but cases are now rising and vaccinations rates remain low. In Thailand, where infections have risen 18-fold since December, fewer than 4% of people have received a first jab. In Vietnam, it’s less than 2%. This wave could spread “like a bush fire across the region”, says Abhishek Rimal of the International Federation of Red Cross and Red Crescent Societies.

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Alex is an investment writer who has been contributing to MoneyWeek since 2015. He has been the magazine’s markets editor since 2019.

Alex has a passion for demystifying the often arcane world of finance for a general readership. While financial media tends to focus compulsively on the latest trend, the best opportunities can lie forgotten elsewhere.

He is especially interested in European equities – where his fluent French helps him to cover the continent’s largest bourse – and emerging markets, where his experience living in Beijing, and conversational Chinese, prove useful.

Hailing from Leeds, he studied Philosophy, Politics and Economics at the University of Oxford. He also holds a Master of Public Health from the University of Manchester.