Why does Taiwan lead Korea in AI equity returns this year?

Taiwan's Equity Outperformance in AI Sector

Taiwanese equities have demonstrated significant outperformance against South Korean counterparts in the global artificial intelligence (AI) trade during 2026, establishing Taiwan as a preferred market for investors. The Taiex Index recorded a gain of 72% in 2026, positioning it as the top performer among over 90 equity indexes tracked by Bloomberg.

In contrast, South Korea’s Kospi Index ranked second with gains of approximately 65% over the same period. This lead widened considerably in the third quarter of 2026, when the Taiex outperformed the Kospi by about 23 percentage points, marking the widest margin observed since the turn of the century.

Investor sentiment also reflects this trend: a survey conducted by Bank of America Corp. in September 2026 revealed that 40% of fund managers were overweight Taiwan, compared to 25% for Korea.

Divergent AI Supply Chain Exposure

The distinction in market performance is largely attributed to the differing nature of AI exposure in each economy. Vikas Pershad, a portfolio manager at M&G Investments in Singapore, noted that Taiwan offers a broader and deeper opportunity set within the AI supply chain.

Taiwan's market benefits from extensive involvement across chip design, manufacturing, packaging, networking, and server components, leading to earnings growth driven by volume. This comprehensive integration means Taiwan is positioned to benefit as AI spending expands across various hardware and infrastructure segments.

Conversely, South Korea's market leadership in the AI sector remains heavily concentrated in major memory chipmakers such as Samsung Electronics Co. and SK Hynix Inc., making it more susceptible to fluctuations in the memory chip cycle.

Earnings Trajectories and Market Valuations

Taiwan's stronger performance is also reflected in its earnings trajectory. For the first time since March 2025, earnings upgrades for Taiwanese companies outpaced those for their Korean peers.

This occurred even as shares of Samsung Electronics and SK Hynix experienced declines of between 19% and 33% during the three months ending September 2026, following a six-quarter period of strong gains driven by surging memory-chip prices.

Strategists at Societe Generale SA, including Rajat Agarwal, have expressed a preference for Taiwan over Korean equities, citing diverging earnings growth. They forecast a slowdown in memory price appreciation over the coming quarters, with normalisation expected in 2028, partly due to increasing Chinese competition.

However, Peter Lee, a managing director at Citigroup Inc., offered a counter-view in early October 2026, suggesting investors should consider buying shares in firms like Samsung and SK Hynix, arguing that the market underestimates future demand for high-bandwidth memory (HBM) chips in 2027.

Broader Market Participation and Future Outlook

Beyond headline index performance, Taiwan's market demonstrates broader participation in its gains. Approximately 10% of stocks within the Taiex Index have at least doubled in value this year, a significantly wider distribution compared to 4.1% for the Kospi and 5.7% for Japan’s Nikkei 225.

Taiwan Semiconductor Manufacturing Co. (TSMC) shares, for example, rose 2.9% in the third quarter of 2026, marking a sixth consecutive quarterly advance. In terms of valuations, the Taiex trades at approximately 18 times its one-year forward estimated earnings, while the Kospi trades at around 5.5 times.

This lower valuation for the Kospi partly reflects concerns about the memory cycle potentially reaching a peak, alongside a longstanding "Korea discount" that has kept its market relatively inexpensive.

Looking ahead, 35% of respondents in Bank of America Corp.'s September 2026 survey indicated Taiwan would benefit most from the next phase of the AI cycle, while only 5% selected Korea.

Implications for Asian AI Investment Strategies

For investors allocating capital within Asia's AI sector, the current market dynamics suggest a strategic re-evaluation of exposure.

The broader and more diversified nature of Taiwan's AI supply chain, encompassing multiple segments from design to manufacturing and networking, offers a potentially more resilient earnings profile compared to Korea's concentration in memory chip production.

While the debate over the memory chip cycle's longevity and future HBM demand continues, the sustained outperformance of the Taiex and the wider distribution of gains among its constituent stocks indicate a deeper pool of opportunities.

Investors may consider focusing on Taiwanese companies that address specific bottlenecks within the AI value chain, as suggested by Gary Tan, a portfolio manager at Allspring Global Investments, rather than relying solely on broad AI enthusiasm.

The next significant data point to watch will be Q4 2026 earnings reports, due in late January 2027, which will provide further clarity on sector-specific demand and earnings trajectories.