This country's stock market is 'most vulnerable to an AI trade reversal': SocGen

According to analysts at Societe Generale (OTC:SCGLY), Taiwan's stock market is currently the most vulnerable to an AI trade reversal.

The bank says Taiwan's equities have become increasingly susceptible due to their high foreign ownership, especially within the semiconductor sector, a cornerstone of the AI industry.

They explain that foreign investors hold more than 40% of the Taiwan equity market and are responsible for 80% of the average trading volume.

However, since July, these investors are said to have become net sellers, with outflows totaling USD 16 billion, reversing the positive trend from the first half of the year.

Societe Generale adds that this capital flight has intensified following statements from former U.S. President Donald Trump regarding Taiwan's defense and chip industry and has further escalated amid the global equity sell-off since July 31.

In contrast, foreign outflows in South Korea, another key player in the semiconductor market, are seen to have been much lower at just $300 million over the same period.

The concentrated foreign ownership in Taiwan's semiconductor stocks makes the market particularly sensitive to any shifts in the global AI trade momentum, according to Societe Generale.

These top semiconductor stocks, which make up more than 40% of the Taiwan Stock Exchange (TWSE) Index, have been the focal point of recent foreign outflows.

Adding to this vulnerability is the lack of domestic support, said the firm. Domestic dealers and proprietary trading desks have also been net sellers, contributing to further downward pressure on Taiwan's stock market.

Societe Generale also highlighted concerns over valuation, noting that Taiwan's technology sector was trading at elevated levels in mid-July, with earnings growth expectations significantly lower than in 2021.