Investment gems: Taiwan, China and the US in the light of artificial intelligence

01.10.2024 13:07|Analyst Team, Conotoxia Ltd.

A good investment is defined not by whether we buy shares in the innovative companies that are the most talked about, but by whether we buy assets below their intrinsic value. Howard Marks, a well-known investor, said: ‘Investment success comes not from buying good things, but from buying them at a favourable price’. Therefore, let's take a look at the current situation of valuations of individual markets.

Table of contents:

  1. United States
  2. Taiwan
  3. The awakening Chinese dragon
  4. Summary

United States

New York University professor Aswath Damodaran follows a similar principle to Howard Marks, saying: ‘keep your eyes on the price’. Analysing the valuation of individual markets, one can conclude that the US stock market does not currently appear to be particularly attractively valued. The fundamental price-to-earnings (P/E) ratio for the main S&P 500 index is 29.9, with a historical average of 16. However, it should be emphasised that these levels are not yet indicative of a speculative bubble or crisis - in such situations the ratio has been above 40, and analysts have sought alternative methods of valuing companies.

S&P 500 - Price to earnings

PE chart S&P 500

Source: MacroMicro

The increased valuations of US equities are due to the increased potential of artificial intelligence technology, which is now not just a future hope, but is translating into real sales growth for many companies. Therefore, it is expected that US indices are likely to be correctly valued, due to the dynamic development of AI.

SPX chart

Source: Conotoxia MT5, US500, Daily

Taiwan

The development of artificial intelligence requires enormous computing power, making the semiconductor sector a particular beneficiary of this trend. The sector is divided into two segments: semiconductor design, led by the well-known company Nvidia, and semiconductor manufacturing. Although most semiconductor design companies are based in the US, as much as 90 per cent of the most advanced semiconductors are manufactured in Taiwan. Taiwan's main index TAIEX, despite earnings growth of 14 per cent year-on-year (versus 9 per cent for the S&P 500 index), is priced significantly lower. The P/E ratio for the TAIEX is 22.8, meaning that, despite its higher growth potential, Taiwanese shares are cheaper than their US counterparts.

TAIEX - Price to earnings

TAIEX PE chart

Source: MacroMicro

The key player here is Taiwan's largest company TSMC, which accounts for more than 20 per cent of this index and is a major semiconductor supplier to giants such as Nvidia, Apple and AMD. These and other leading technology companies have announced increased investment in the development of artificial intelligence technology, which will require an increasing number of specialised graphics cards and processors, and in their production Taiwan has an undeniable global competitive advantage. For this reason, it is expected that the current valuations of Taiwan's equity indices appear more attractive than their US counterparts, and that artificial intelligence development could be a key driver of earnings growth in the coming years.

TSMC chart

Source: Conotoxia MT5, TaiwanSemic, Daily

The awakening Chinese dragon

One of the cheapest equity markets among the major economies is China. The MSCI China index is trading with a P/E ratio of 11.3, which means that it is almost three times lower valued than the US S&P 500. Behind such a low valuation of Chinese equities is the country's economic situation. Following the bankruptcy of major property developer Evergrande Group, the Chinese economy is facing numerous problems. In response, the government, with the involvement of the People's Bank of China, has decided on one of the boldest support programmes in recent years.

MSCI China - Price to earnings

PE China chart

Source: MacroMicro

The central bank cut interest rates and reserve requirements for banks to stimulate economic growth and ease the property crisis. The interest rate on existing mortgages fell by 0.5 percentage points, and the minimum deposit for the purchase of a second home was reduced from 25 per cent to 15 per cent. The central bank also announced programmes to support stock market investment through loans from the central bank. Since this decision was announced, the entire Chinese index has gained as much as 24 per cent in just one week. it is expected that the Chinese stock market can still contain many attractively valued companies.

China50 chart

Source: Conotoxia MT5, China50, Daily

Summary

Stock market indices in the US, China and Taiwan may yet surprise investors in the future. While the US market appears to be correctly valued, especially in the context of the development of artificial intelligence, Taiwanese stocks, especially in the semiconductor sector, have more attractive valuations with strong growth potential. China, on the other hand, offers the lowest valuations among the major economies, and government and central bank actions may support further market growth despite the current economic challenges. It is important to remember to pay particularly close attention to the valuations of individual markets and stocks because, as we quoted in the introduction, ‘Investment success comes not from buying good things, but from buying them at a favourable price’.

 

Grzegorz Dróżdż, CIIA, Market Analyst of Conotoxia Ltd. (Conotoxia investment service)

The above trade publication does not constitute an investment recommendation or information recommending or suggesting an investment strategy within the meaning of Regulation (EU) No. 596/2014 of April 16, 2014. It has been prepared for informational purposes and should not form the basis for investment decisions. Neither the author of the publication nor Conotoxia Ltd. shall be liable for investment decisions made on the basis of the information contained herein. Copying or reproducing this publication without written permission from Conotoxia Ltd. is prohibited. Past performance is not a reliable indicator of future results.

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76.23% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 76.23% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
Trading on CFDs is provided by Conotoxia Ltd. (CySEC no.336/17), which has the right to use the Conotoxia trademark.