(Bloomberg) — The long-favored arbitrage strategy of buying shares of Taiwan Semiconductor Manufacturing Co. in Taipei while shorting its shares in the U.S. is starting to get painful.
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Data compiled by Bloomberg showed that enthusiasm for artificial intelligence in the United States has pushed TSMC's American depositary receipts to their most expensive price against Taiwanese stocks since 2009. As of Friday, they were trading at a premium of about 21%, compared with less than 8% for the average The five years. It reached a high of 30% during the Lunar New Year in February, when the Taiwanese stock market was closed.
“A lot of people have built it and are hoping it will collapse back to a fair value level over the long term,” said John Withhar, head of Asia special situations at Pictet Asset Management. He added that the premium could go up, “and then there will be a lot of pain.”
TSMC's cutting-edge technology and reasonable valuation have made it a favorite among global AI investors. Interest rates have risen 66% this year through Friday, compared with a 55% rise in Taipei stocks. However, both are trading well below their 2021 valuation highs.
ADRs have outperformed because they are easier for foreign investors to access. They're also included in metrics like the Philadelphia Stock Exchange Semiconductor Index and in exchange-traded products like the VanEck Semiconductor ETF and iShares Semiconductor ETF, meaning the funds they track must buy U.S.-listed securities.
“It's supply and demand dynamics,” said Brian Freitas, founder of research firm Periscope Analytics. “Not all foreign investors can hold Taiwan stocks, so they prefer to only own ADRs. Plus there are some indices that only point to ADRs, so the ETFs then basically buy US stocks.”
Furthermore, TSMC's ADRs typically trade at a premium because they are fungible, unlike Taiwanese shares, which need special regulatory approval to convert to their U.S. equivalent. Asian securities are also largely owned by fund managers, making it difficult for them to increase their positions further.
Read also: TSMC stock rises 42% triggers weighting limits for some funds
For now, the AI sector remains active, with Nvidia Corp. worth more than $3 trillion in market capitalization and a gauge tracking semiconductor stocks at a record high. The premium for TSMC's ADRs over domestic stocks rose to an average of about 17% this quarter after reaching 30% in February.
“The AI boom is far from over,” Weithar said. “I am happy to wait for the escalation to expand and perhaps even for the panic to subside.”
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(An earlier version of this story corrected the move Taiwan stocks have seen this year.)
– With the help of Betty Ho.
(Updates with additional context in second paragraph)
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