As tensions rise between China and Taiwan, some equity investors are rethinking their commitment to Taiwan Semiconductor Manufacturing Co (TSMC), the world’s top contract chipmaker. Names like Martin Currie’s Zehrid Osmani and Shelton Capital Management’s Bruce Kahn have reduced or sold off their TSMC stakes in recent months. Instead, they are moving towards ASML Holding, an essential supplier to TSMC.

TSMC’s stock surged by 22% this year, which seems counterintuitive

This shift in investment behavior seems counterintuitive, given that TSMC’s stock surged by 22% this year, outpacing ASML’s near 10% gain. Nonetheless, the underlying factor for this is heightened geopolitical volatility surrounding Taiwan, a region of vital interest in the U.S.-China dynamics. Investors like Warren Buffett, for instance, find the risk of a geopolitical flare-up outweighing TSMC’s market prowess.

TSMC

ASML Holding, based in the Netherlands, is an appealing alternative. The company manufactures lithography machines crucial in chip production and has a diversified client list featuring industry giants like Intel and Samsung. According to David Allen of Plato Investment Management, ASML stands as a more geopolitically insulated choice, offering an “investor safe haven” of sorts.

This investor sentiment suggests a disconnect between market valuations and geopolitical risks. Bruce Kahn opines that current market valuations of TSMC do not adequately factor in the geopolitical tensions, drawing parallels to the investor unpreparedness seen during Russia’s invasion of Ukraine.

The pivot toward ASML is not without its hurdles. The company saw a slump in orders in the last quarter, while TSMC exceeded quarterly sales expectations. Both remain vulnerable to the ongoing U.S.-China chip feud. Still, ASML stands to gain from TSMC’s expanding global footprint, particularly in Germany and the U.S., which will require more of ASML’s equipment.

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