The global AI trade has turned South Korea and Taiwan into Asia’s top two stock markets this year. Yet for foreign investors, the region’s most compelling destination lies elsewhere: Japan.
(June 3): The global artificial intelligence (AI) trade has turned South Korea and Taiwan into Asia’s top two stock markets this year. Yet for foreign investors, the region’s most compelling destination lies elsewhere: Japan.
Overseas investors have sold nearly US$70 billion of Korean shares this year, while flows into Taiwanese equities have also flipped negative, according to data compiled by Bloomberg. By contrast, Japan had attracted US$73.6 billion of inflows as of May 22.
Japan also emerged as the favorite Asian stock market in a Bank of America fund manager survey conducted on May 8-14.
The contrast shows global investors’ growing preference for the Japanese market’s structural advantages, including its depth and diversity, as well as the country’s corporate governance reforms. Their retreat from Korea and Taiwan also raises fresh questions about the durability of a blistering AI rally concentrated on a few chipmakers and accelerated by a rapid buildup of financial leverage.
“Japan is the most investable Asia market after all, as it’s much bigger and broader,” said Chauwei Yak, chief executive officer at hedge fund GAO Capital in Singapore. “Even though the Korea market has done better, it’s really like two stocks there.”
Yak was referring to Samsung Electronics Co and SK Hynix Inc, which together make up more than half of the total weightings of Korea’s benchmark Kospi index. Similarly, Taiwan Semiconductor Manufacturing Co accounts for nearly 42% of the Taiex gauge.
Meanwhile, the weightings of Japan’s Topix index are so spread out that its top three constituents Mitsubishi UFJ Financial Group, SoftBank Group Corp and Toyota Motor Corp each accounts for around 3%.
While financial firms have been the outperformers in Japan this year, the country’s technology companies also have benefitted as the popular AI trade broadened. Among the highlights are Taiyo Yuden and Murata Manufacturing Co, which dominate supply of a key product used for constructing AI data centres. Both have seen their shares at least doubled in the past month.
“Korea is a memory trade. Taiwan is a foundry trade. Japan is an economy trade, with an AI kicker,” Barclays global chairman of research Ajay Rajadhyaksha wrote in a note. “That distinction matters enormously if the memory cycle turns.”
The more diversified market landscape has lent greater stability to Japanese shares, especially compared with the leverage-driven price swings seen in Korea. As foreign investors sell, Korea’s risk-loving and fickle retail investors have stepped in, actively scooping up shares.