Will AI continue to supercharge the Taiwan Stock Market?Our View:
The SGX FTSE Taiwan Index Futures contract has been making new all-time highs, powered by the AI frenzy.
A key characteristic of the underlying index is its tech-heavy composition , where technology (61.36%) is by far the largest sector.
This is well above the S&P 500’s technology weightage of 29.83%.
Top 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.
The underlying FTSE Taiwan RIC Capped Index adopts a capping methodology- with individual stock weights capped quarterly at 20%; while stocks over 4.5% in weight cannot exceed 48% of the total index weight in aggregate.
From a tactical perspective, a key point of consideration would be the individual weight of TSMC in the underlying index. TSMC is a major player in the global semiconductor industry, as it dominates the foundry market with around 58% market share. It manufactures chips for some of the largest companies in the world including Apple, Nvidia, Advanced Micro Devices, and Sony. A greater weightage would make the index more sensitive to the fluctuations in TSMC’s share price.
Notably, TSMC has an outsized weightage of 43% in the uncapped FTSE Taiwan Index, while it accounts for 22.43% 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.
We believe the AI story remains relevant and will be a long-term structural growth driver; although an overcrowded market could limit further upside. In the meantime, we see any near-term weakness or pullback as an entry opportunity.
Expressing Our View:
We favor the hypothetical trade setup below in order to express our view:
Long FTSE Taiwan Index Futures:
The 4-hourly chart shows the contract recently breaking through the key psychological resistance level of 1,700.
The contract has been on an uptrend since October 2022. There was a false breakout of support in mid-October 2023 around 1,410 – 1,420 which resulted in a continuation of the uptrend.
With a Trend-based Fibonacci Extension drawn from the 31 October 2023 low, we take entry at current market price of 1,721. Although we prefer to buy on any near-term weakness.
We set our target level at the 176.4% extension level around 1,800. Stop loss is set below the key psychological resistance at 1,690. This setup delivers a reward: risk ratio of 2.55x.
• Entry Level: 1,721
• Target Level: 1,800
• Stop Loss Level: 1,690
• Profit at Target: 316 x $40
• Loss at Stop: 124 x $40
• Reward: Risk Ratio: 2.55x
