In the 1998 blockbuster sci-fi movie Armageddon, Bruce Willis and his crew raced to save Earth from an incoming asteroid. In one scene, a Russian cosmonaut trying to fix a failing space shuttle exclaimed, “Components, American components, Russian components, all made in Taiwan!” He then proceeded to whack the equipment with a spanner, which fixed it (of course).

While Taiwan may not be top-of-mind when one thinks of space components today, it is certainly top-of-mind in the semiconductor industry. Taiwan produces over 90% of the world’s most advanced semiconductor chips, specifically those measuring 7 nanometres and smaller. We recently initiated an Opportunistic trade idea in Taiwan equities to capture attractive exposure in the semiconductor industry. To understand why Taiwan holds such a structural advantage today, it helps to examine how its dominant position was built.

Engineering an edge

The ‘Taiwan Miracle’ from the 1960s to the 1970s transformed Taiwan from an agrarian economy into an industrialised one. The development of the textiles, electronics and manufacturing industries fuelled the rise of its middle class. However, the true turning point came in the 1980s, when strategic research and development (R&D) planted the seeds of a technological revolution.

Leveraging its industrial capabilities, Taiwan pioneered the pure-play ‘foundry’ model, exclusively manufacturing chips designed by other companies. This unlocked a new wave of fabless chip designers – semiconductor companies that research, design and market semiconductor chips but outsource the physical manufacturing to third-party foundries, such as those in Taiwan.

The surge in fabless chip designers created a powerful flywheel effect. As Taiwanese foundries gained more customers and produced greater volumes, they achieved the economies of scale necessary to deliver better yields and lower costs. This, in turn, attracted more customers. Meanwhile, relentless R&D and capital investment continued to support the foundries.

Sustaining the edge

Building on this momentum, an irreplaceable ecosystem developed around the Hsinchu Science Park in northwestern Taiwan to support chip manufacturers. Today, this semiconductor ecosystem comprises suppliers, servicing personnel, assembly and testing companies, spare part providers and a concentrated talent pool.

These deeply integrated supply networks ensure that Taiwanese foundries’ relationships with key customers create bilateral dependencies that are difficult to unwind. The fabless chip designers and smartphone makers that have been partnering with the foundries of Taiwan for years would face prohibitively high switching costs if they look elsewhere, cementing Taiwan’s dominant position in the global market.

Future growth and opportunities

Looking ahead, Taiwan’s formidable semiconductor footprint is uniquely positioned to benefit from the global buildout of artificial intelligence (AI). As corporates and governments continue to adopt AI tools, we expect AI capital expenditure (capex) to continue to rise. We expect 32% average annual growth in AI capex from 2025 to 2030, which would benefit the semiconductor industry, particularly the advanced chipmakers.

The Taiwan equity market is dominated by the technology sector, which represents about 88% of the benchmark market index, and most of this is the semiconductor industry. The Taiwan equity market has indeed performed well in the last few years. More recently, it has corrected slightly from its peak as global equity markets digest new equity supply and concerns around potential overinvestment in AI. However, we expect the upcoming Q2 earnings season to validate a sustained growth story. Gradual progress in the reopening of the Strait of Hormuz would also benefit Taiwan, as it is an energy importer.

The broad Taiwan equity index is expected to deliver earnings growth of 51% and 28% in 2026 and 2027, respectively, according to Bloomberg consensus. Looking at its valuation, the 12-month forward price-to-earnings ratio of 21x sits at the upper end of its historical range, but is, in our view, justified by the strong growth expectations.

An AI bubble?

The elevated valuation of the Taiwan equity index inevitably raises the question of whether tech markets are overheating. Our Global Chief Investment Office’s AI Bubble Meter has recently been upgraded from a ‘Good’ to ‘Better’ risk-reward profile, driven by strong supply chain channel checks and renewed confidence in Big Tech’s AI investment ambitions amid improving signs of AI monetisation.

As such, we do not see an AI bubble currently. On the contrary, we would want to gain exposure to AI investments, and the Taiwan equity market presents an attractive opportunity at the moment.

There are risks, of course, including potential manufacturing hiccups that could pressure profitability, particularly in the development of advanced chips. Any economic slowdown that leads to a sharp slowdown in AI capex could also dim near-term growth prospects for semiconductors. The complex supply chain in semiconductor manufacturing also faces risk of disruption from geopolitical or trade tensions. However, these ever-present risks do not diminish the fact that Taiwan’s semiconductor moat is difficult to replicate and is nearly indispensable to the global AI story. For investors seeking to capitalise on the global AI and tech opportunity, Taiwan remains a compelling market.