View from Crystal Bay: Forget FAANG, What’s Going on in Asia?

Investors aren’t limited to only investing in the S&P 500 and the Dow Jones Industrial Average. Every week we share the market trends we are following. We are interested in whether the trends in those markets are continuing or if they are experiencing a temporary or complete reversal.

When we identify trends, we are only concerned about the price data and what it says about any given market. We don’t need to know why a trend has formed to invest, but our human nature wants to understand what is driving them. Each week we try to offer some perspective on what we think the most substantial moves are and what critical drivers are behind them. Here we look at what is going in our globally diversified, non-correlated Crystal Bay Ubitrend strategy.

Last week’s continuing trends:

  • Taiwanese Equities 
  • FAANG Stocks
  • Lean Hogs
  • Swiss Franc
  • Russell 2000 Index

Last week’s reversing trends:

  • Soybeans
  • Soybean Meal
  • Italian Bonds
  • Maize

What we are taking note of: 

The rise of technology shares in the US has been spectacular during the pandemic year 2020, and tech stocks are increasing their share of total market capitalization. They now represent more than a quarter of the S&P 500 market cap. But the US market doesn’t stand out globally in its technology weighting. That distinction belongs to two Asian tigers: Korea and Taiwan. In each of these markets, a single technology company represents more than a third of total market capitalization.

KOSPI – 1 Year Chart

TAIEX – 1 Year Chart

The dominant company in the Korean market is Samsung Electronics. Its parent, the Samsung Group, was founded during the Japanese occupation of Korea in 1938, and it was modeled on the Japanese conglomerate Mitsubishi Corporation (even their names mean the same thing—Three Diamonds—in Korean and Japanese). After the Korean war, the South Korean government promoted industrial development by channeling cheap capital and business opportunities to a small group of well-connected corporations, of which Samsung was one. It diversified from trading into food, textiles, banking, insurance, shipbuilding, retail, and electronics.

Samsung Electronics, the technology subsidiary of the Samsung Group established in 1969, grew from nothing to become the 2nd largest technology company in the world after Apple. It is the world’s largest manufacturer of semiconductors, consumer electronics, televisions, and mobile phones. It has much to be proud of, but it also has plenty to be ashamed of.

Samsung is now under the control of the 3rd generation of the Lee family. The transition from the 2nd generation to the 3rd generation did not go well. Lee Kun-hee, the founder’s son, was convicted in 2008 of tax evasion and breach of trust. It took a presidential pardon for him to return to the company. His son and successor, Lee Jae-yong, became embroiled in a bribery scandal that sent him to jail for a year in 2017; he was released, retried, and convicted again. On Jan. 18, 2021, he was sentenced to a further 18 months in prison.

The turmoil at the top of Samsung Electronics barely dented its soaring stock price. It now seems unlikely that Lee Jae-yong will be able to pass control of the company to his children, which opens the door to more professional management and improved corporate governance. Samsung Electronics traded at a large discount to its global peers because of the overhang of Lee family scandals. Liberated from Lee’s control, it may become even more valuable.

The Taiwanese stock market is similar to Korea in its exposure to a single technology company. Taiwan Semiconductor Manufacturing Company (TSMC), is the brainchild of a single man. Morris Chang was a refugee from the Chinese civil war, escaping the Communist takeover by moving to Hong Kong and then to the US. Educated at Harvard, MIT, and Stanford, he became an electronics engineer and quickly climbed the ranks at Texas Instruments. When he was passed over for the CEO position at TI, he accepted an offer to come to Taiwan and founded TSMC in 1987.

The idea behind TSMC was revolutionary. Until then, all semiconductor companies made their own chips, but the rising cost of manufacturing equipment made it harder and harder for smaller firms to keep up. TSMC offered so-called foundry services: it would manufacture semiconductors for others. This opened the doors for startups that couldn’t afford their own equipment to enter semiconductor markets with their own designs. A whole industry of “fabless” semiconductor companies sprung up, both in Taiwan and in the rest of the world, creating a virtuous circle. The more companies used TSMC’s manufacturing services, the more it could spend on leading-edge capital equipment; and the more leading-edge its technology became, the more companies abandoned their own manufacturing facilities and transferred the business to TSMC.

In a bombshell announcement in 2020, Apple decided to move all of its future computers away from Intel microprocessors to their own chips, manufactured by TSMC. By taking the mantle of the most advanced semiconductor manufacturer from Intel, TSMC became the world’s most strategically important company. In a remarkable development, the US had to beg TSMC to open an advanced manufacturing facility in Arizona in order to keep access to cutting-edge chips. It is said that China and America cannot go to war over Taiwan because neither can afford losing access to TSMC chips made there. Apple cannot survive without TSMC, but TSMC can survive without Apple.

If our future is to be filled with more and more technology, as seems likely, the Korean and Taiwanese stock markets may benefit more than markets in the US. A global winner in a small market will carry greater weight than a global winner in a more diversified, broader market.