AI expected to continue driving Taiwanese stock market

Based on the underlying FTSE Taiwan RIC Capped Index, the SGX FTSE Taiwan Index Futures contract provides exposure to about 119 large-cap and mid-cap stocks in Taiwan. As a region, the Taiwan stock market has posted new all-time highs, mainly driven by the artificial intelligence (AI) frenzy. In terms of total return, the contract is up by 9.74 per cent year to date (YTD), beating the Nasdaq’s 7.09 per cent YTD gain as at Mar 19.

We remain constructive on the FTSE Taiwan Index Futures contract and expect it to trade within a range throughout 2024, between the 161.8 per cent extension level around 1,760 to 1,770, and the 138.2 per cent extension level around 1,720 to 1,730. Based on a Fibonacci Extension drawn from the low on Oct 31, 2023, our thesis is validated if the contract sees a sustained close above the key psychological resistance level of 1,700.

A key characteristic of the underlying index is tech-heavy composition, where technology is the largest sector at 61.36 per cent. This is well above the S&P500’s technology weightage of 29.83 per cent. Notable holdings in the index include foundry giant Taiwan Semiconductor Manufacturing (TSMC), smartphone chipmaker MediaTek, and Apple supplier Hon Hai Precision Industry, also known as Foxconn.

Crucially, the underlying FTSE Taiwan RIC Capped Index adopts a capping methodology, where individual stock weights are capped quarterly at 20 per cent. Additionally, stocks over 4.5 per cent in weight cannot exceed 48 per cent of the total index weight in aggregate.

From a tactical perspective, a key point of consideration would be TSMC’s individual weight in the underlying index. As a major player in the global semiconductor industry with around 58 per cent market share, it manufactures chips for some of the largest companies in the world including Apple, Nvidia, Advanced Micro Devices, and Sony. A greater TSMC weightage would make the index more sensitive to fluctuations in the company’s share price.

Notably, TSMC has an outsized weightage of 43 per cent in the uncapped FTSE Taiwan Index, while it accounts for 22.43 per cent of the FTSE Taiwan RIC Capped Index (yet to be re-capped). We believe this feature helps reduce concentration risk and makes the FTSE Taiwan RIC Capped Index, and by extension, the FTSE Taiwan Index futures contract, more diversified and less volatile compared to the uncapped index.

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From a technical perspective, the 4-hourly chart shows the FTSE Taiwan Index futures contract heading towards the key psychological resistance level of 1,700. The contract has been on an uptrend since October 2022. In addition, there was also a false breakout of support in mid-October 2023 at around 1,410 to 1,420, followed by a resumption of the uptrend. Some other key technical observations supporting our bullish thesis are:

- The 14-day Relative Strength Index (RSI) indicator is in bullish territory around 53. We think the contract has further upside potential before hitting the overbought level of 70. As long as the RSI remains at or above 50, the bullish momentum should remain intact.

- In mid-January, the 50-day moving average crossed above the 200-day moving average, indicating a “Golden Cross” which typically serves as a bullish signal.

In summary, we hold a constructive view on the FTSE Taiwan Index futures contract and expect it to see moderate upside potential between the 161.8 per cent and 138.2 per cent extension level before the end of 2024. We believe the AI story remains relevant and will be a long-term structural growth driver, despite the potential limitation posed by an overcrowded market. Nonetheless, we see any near-term weakness or pullback as an entry opportunity.

The writer is investment analyst at Phillip Nova