Taiwan Versus Korea Stocks Debate Arises in Tech Sector

(Bloomberg) -- Taiwan’s tech sector has trumped its South Korean peer so far this year. But the debate continues on which one will likely outperform in the months to come.

Despite a worse start to 2020 before the coronavirus shock began to unfold, the MSCI Taiwan Information Technology Index has rallied to pare year-to-date losses to 10% on a U.S. dollar basis, compared to a 14% drop in the Korean equivalent.

To Societe Generale SA., the outperformance is because companies in Taiwan are more aligned to new technologies like 5G, while Korea tech still gets a significant percentage of earnings from more volatile and less profitable segments like memory and telecom devices.

“We expect the trend to continue,” as the industry difference is unlikely to change in the near term, strategists including Jason Daw wrote in a note Wednesday. “We see more headwinds to Korea’s technology sector earnings in the wake of a weaker smartphone and memory chip outlook.”

The Taiwan dollar may also be more resilient than the Korean won, they added.

The strategists recommend going long the MSCI Taiwan Information Technology Index and short the Korean one. Or investors could own a basket of Asia 5G names and sell short the MSCI Asia Index, they said.

Earnings Estimates

The relative optimism for Taiwan tech can also be seen in earnings forecasts. Analysts tracked by Bloomberg have cut Taiwan tech stocks’ 12-month profit estimates by 5.6% from a peak in February. That compared with a 6.5% downward revision for Korean tech stocks.

That said, Korea-based analysts suggest the outlook for the memory chip industry is improving, which will benefit domestic tech shares.

The latest positive sign comes from Micron Technology Inc., which raised its revenue forecast for the current quarter on strong chip demand from cloud providers, said Lee Do-hoon, an analyst at CIMB in Seoul. “When the semiconductor industry turns around, both memory and non-memory chips tend to move almost together.”

The MSCI Korea Information Technology Index jumped as much as 2.8% Thursday, with memory-chip makers Samsung Electronics Co Ltd. and SK Hynix Inc. contributing most to the gains.

©2020 Bloomberg L.P.