Taiwan Stock Market 2H25 Outlook: Can Taiwanese Stocks Break Through Tariff & FX Barriers?

Reviewing the performance of the Taiwan stock market in 1H25, the TWSE Index has recovered nearly 4,600 points from 9 Apr 25 to 20 Jun 25, returning to the 22,000-point level. However, it remains down by over 3% year-to-date, making it one of the weakest performers among global markets. Consistent with the context of our previous article on TSMC "How Can TSMC Withstand the Market Turbulence?", the Taiwan stock market has been weighed down by a series of factors, including market concerns over high-end chip demand triggered by DeepSeek, threats of 100% tariffs from Trump, and the US imposing a 32% reciprocal tariff on Taiwan during Liberation Day. These developments have raised investor concerns about whether the long-term outlook for Taiwan stocks will be impacted by fundamental pressures.

In fact, we believe that the Taiwan stock market is likely facing short-term headwinds dragging its performance. However, in the long run, as a country with strong manufacturing moats in both semiconductors and electronic products, we believe that Taiwan stocks can maintain a degree of resilience amid market uncertainties, preserving attractive upside potential. This article will analyse the underlying reasons.

Sharp Appreciation of the New Taiwan Dollar (TWD) Poses Short-Term Headwinds for Taiwan Stocks

From early April to date, the USD has sharply declined against the TWD (equivalent to an appreciation of the TWD.) In early May, it fell nearly 10% over the two trading days, marking the largest drop since 1987, and has now stabilised at around 29.5 (as of 20 Jun 25, equivalent to approximately 0.034 TWD per USD). While the reasons for the TWD’s sharp appreciation are widely debated, we believe two explanations are more plausible: first, due to the recent weakness of the USD, Taiwanese insurance companies holding significant USD assets may have increased FX hedging ratio, while some institutional investors unwound carry trades financed in TWD to prevent further losses; second, to mitigate the impact of USD depreciation, a proportion of Taiwanese exporters converted large USD holdings into TWD to reduce losses.

Although the TWSE Index recorded a rebound during this period, for an export-led economy like Taiwan, currency appreciation reduces the competitiveness of exporters’ products and impacts company earnings. In the foreseeable future, we will incorporate FX factors into our analysis below to reflect the impact of TWD’s sharp appreciation on the stock market.

Figure 1: Historical data suggests that the TWSE Index may rise against the trend during periods of TWD strength.

Taiwan's Economic Outlook Remains Relatively Resilient Amid Tariff Pressures

Taiwan's 1Q25 GDP grew by 5.48% YoY, surpassing expectations and previous figures, marking the fastest growth rate since 1Q24. Although the economy was primarily driven by exports during the quarter (with goods and services exports rising 20.29% YoY), particularly following the US announcement of a 90-day suspension of reciprocal tariffs, which prompted global companies and clients to stockpile goods to avoid tariffs, other factors were also at play. The Directorate-General of Budget, Accounting and Statistics (DGBAS) noted that the continued expansion of AI applications has prompted increased participation by cloud service providers and multiple countries in enhancing computing power, as well as robust demand for AI infrastructure investments. In addition, the gradual easing of supply bottlenecks for high-end ICT products and related components have sustained strong export performance. This conveys an important message: Taiwan's exports are driven by the global digitalisation trend and structural AI demand, aligning with our long-term outlook.

Indeed, trade protectionism advocated by the US and uncertainties surrounding tariffs are expected to inevitably suppress global trade activities. Consequently, authorities project that Taiwan's goods exports will rise by 22.6% YoY in 1H25 but decline by 3.2% YoY in 2H25, resulting in an overall yearly increase of over 9%. We believe this forecast is reasonable, as preemptive stockpiling by companies is expected to gradually taper off in the coming two quarters due to rising inventories, while economic uncertainties may dampen company investment and consumer confidence. Additionally, the appreciation of the TWD could reduce export competitiveness. Nevertheless, despite the downward revision of Taiwan’s full-year economic growth forecast, the projected growth rate of 3.1% still indicates that authorities remain relatively optimistic about the local economy’s resilience, which could bolster investor confidence in the stock market.

In fact, exports account for approximately 60% of Taiwan’s GDP, and as of the end of 2024, the US accounted for over 23% of Taiwan’s total export value—the highest level since 2000—reflecting Taiwan’s growing reliance on US demand. At the same time, this underscores the critical importance of Taiwanese manufactured products to the US, with ICT products comprising about 60% of Taiwan’s exports to the U.S. Taiwan’s dominant position in the semiconductor industry means that the US’s ability to maintain its leadership in the AI race relies heavily on Taiwan’s currently irreplaceable advanced technologies. Therefore, we believe Taiwan holds considerable bargaining power in trade negotiations with the US (concerning reciprocal tariffs and semiconductor-related tariffs). Should both parties reach a trade agreement more favorable than market expectations (e.g., lower tariff rates on Taiwan), this would undoubtedly benefit Taiwan’s economy and stock market.

TSMC to Continue Leading the Technology Sector and Driving the Stock Market

On 21 May 25, the US government disclosed a letter from TSMC to the Bureau of Industry and Security, in which TSMC stated that tariffs would suppress demand for electronic products, impacting its revenue and undermining its financial capacity to advance its Arizona project as planned. Months earlier, in response to Trump’s push to revive US onshoring of manufacturing, TSMC committed to investing USD 165 billion in building wafer fabrication plants in the US as a bargaining chip for tariff exemptions. We believe this move increases the likelihood of TSMC securing exemptions (or facing lower tariffs). If realised, reduced manufacturing costs would benefit the technology supply chain, including TSMC, acting as a catalyst for upward movement in its stock price.

Figure 2: Historically, TSMC and the TWSE Index Have Moved in Tandem

Based on our earlier article, we noted that TSMC’s 1Q25 performance continued to demonstrate strength following 4Q24, maintaining its full-year revenue growth forecast (24%–26%) and unchanged CAPEX (USD 38 billion to USD 42 billion). This reflects management’s confidence in the company despite uncertainties surrounding tariffs. Additionally, TSMC’s Chairman, C.C. Wei, stated during the earnings call that tariff risks have not altered customer attitudes, indicating resilient demand for TSMC’s advanced chips and packaging technologies from major tech clients such as Apple, NVIDIA, and AMD. TSMC’s earnings outlook remains unaffected by demand-side concerns. Furthermore, at the Computex Taipei event in May, NVIDIA announced the establishment of a regional headquarters in Taipei, which will serve as a key hub for AI, robotics, and supercomputing technologies. This underscores the strong confidence of leading global semiconductor companies in Taiwan’s technological capabilities, a factor investors should not overlook.

As of 20 Jun 25, TSMC accounts for approximately 39% of the TWSE Index, and rough estimates suggest its projected earnings for 2025–2027 will contribute 30%–40% of the index’s total earnings. We forecast TSMC’s earnings growth at 27% and 18% for the next two years, respectively (accounting for FX impacts, as below), with its optimistic structural profitability expected to continue driving the technology sector and benefiting the broader Taiwan stock market over the long term.

Additionally, the two other major constituents of the TWSE Index, Hon Hai and MediaTek (each representing approximately 3% of the index), reported solid 1Q25 results. Hon Hai achieved record-high revenue for the same period, while MediaTek’s revenue exceeded expectations. Although Hon Hai’s chairman expressed caution regarding tariff and FX impacts, he emphasised the company’s flexible supply chain management and globally diversified factory network. We anticipate that Hon Hai’s mass production of NVIDIA’s GB200 servers starting early this year, along with orders for GB300, will accelerate growth in its cloud computing business, with promising long-term profitability. Similarly, MediaTek’s CEO indicated that tariffs have not significantly altered customer orders, and the company plans to launch its next-generation flagship chip, the “Dimensity 9400+,” in 2H25, which is expected to gain traction among existing clients. Brokerages also project that MediaTek’s market share in consumer electronics, automotive, and data center chips will expand, offering significant long-term growth potential.

Factoring in FX effects, we have revised downward our earnings forecasts for Taiwan’s technology sector, with projected growth of 15% and 17% for this year and next, respectively. However, given double-digit earnings growth and the technology sector’s over 70% contribution to the index’s weight and earnings, it is expected to remain the primary long-term driver of the Taiwan stock market.

Financial Sector Expected to Pose Some Drag

In contrast to the technology sector, Taiwan’s financial sector is anticipated to face greater negative impacts from FX factors this year. While domestic banks are expected to continue benefiting from loan growth and fee income, with limited impact from TWD appreciation, life insurance companies will bear the brunt. In fact, Taiwan’s life insurers hold a significant portion of their assets overseas (denominated in USD), and the appreciation of the TWD has significantly reduced the value of these assets. This is expected to drag down profits for financial sector players, including Fubon Financial and Cathay Financial.

Given the strong TWD and expected FX volatility within the year, domestic life insurers face a dilemma between rising hedging costs and FX losses. Moreover, rating agency Fitch recently placed five Taiwanese life insurers on a negative rating watch, suggesting that the short-term outlook for life insurers, such as Fubon Financial and Cathay Financial, will be hampered by FX challenges. Consequently, we forecast the financial sector’s earnings to grow by -23% and 17% for this year and next, respectively.

AI Structural Story Sustains Taiwan Stock Market Outlook