Here's Why This Country & Its ETFs Are Big Beneficiaries of AI Boom
Taiwan ETFs including iShares MSCI Taiwan ETF EWT and Franklin FTSE Taiwan ETF FLTW are up 19% and 20% this year (as of Jun 22, 2023), beating the S&P 500. In the past month, each of the two ETFs have gained about 5%. We expect the rally is expected to continue in the near term. Both the ETFs have a Zacks Rank #2 (Buy). Let’s find out why the rally is possible.
Taiwan ETFs Are Heavy on Semiconductor
Taiwan ETFs are heavy on chip-related companies like Taiwan Semiconductor, Hon Hai Precision and Mediatek Inc. Information Technology takes about 60% of EWT and FLTW each.
The rapid adoption of cutting-edge technology like cloud, Internet of Things, gaming, wearables, VR headsets, drones, virtual reality devices, artificial intelligence (AI), cryptocurrencies, 5G and other advanced information technologies, as well as the solar power industry, have been fueling the massive demand for semiconductors.
AI Boom & Semiconductor
High demand for chips needed to create AI systems and increased usage of chips in automobiles should continue to benefit semiconductor makers. Data centers will also require more chips to handle AI workloads (read: Chip ETFs on Track for Their Best First Half on Record).
Nvidia’s super-upbeat Q1 results and guidance acted as a cornerstone for the entire semiconductor industry in the near term. So, if you believe that the ongoing massive AI rally could be over anytime, better to bet on more value-centric AI beneficiaries like semiconductors to stay tuned with the continuing AI journey.
Improving Supply Chain & Cooling U.S. Inflation
China reopened its economy this year after COVID-19 lockdowns in 2022. Inflation started to cool in 2023, and the Fed started to lower the magnitude of rate hike. Geopolitical tensions and the regional banking crisis also contributed to the lower rate hikes. This situation benefits technology and communication companies in the United States, which rely on Taiwan's semiconductor companies as the latter’s clients.
Interest Rate & Inflation Lower than United States
Moreover, interest rates are quite low in Taiwan compared with United States. The central bank of Taiwan held its key discount rate at 1.875% during its June 2023 meeting, in line with market expectations and pausing from a year-long tightening cycle.
Although the country's headline inflation slowed to 2.02% in May, the lowest level in nearly two years, the regulator increased its price growth forecast for 2023 to 2.24% from the previous 2.09%, while the GDP projection was revised lower to 1.72% from 2.21% (read: Following Morgan Stanley? Tap These ETFs).
In comparison, the key interest rate and inflation in the United States were at the 5%-5.25% range. The consumer price inflation in the United States declined to 4.0% in May 2023.
Cheaper Valuation
The funds EWT and FLTW have a P/E of 10.77X and 13.79X, respectively. In comparison, SPDR S&P 500 ETF Trust SPY has a P/E of 17.86X. Such cheaper valuation calls for continued rally in Taiwan ETFs.
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SPDR S&P 500 ETF (SPY): ETF Research Reports
iShares MSCI Taiwan ETF (EWT): ETF Research Reports
Franklin FTSE Taiwan ETF (FLTW): ETF Research Reports
