Popular arbitrage trade backfires as TSMC frenzy grows in US

(Bloomberg) — The long-favored arbitrage strategy of buying shares of Taiwan Semiconductor Manufacturing Co.s Taipei while shorting its U.S. listing is starting to become painful.

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Enthusiasm over artificial intelligence in the United States pushed TSMC's American depositary receipts to their highest price against Taiwanese stocks since 2009 this quarter, according to data compiled by Bloomberg. As of Friday, they were trading at a premium of about 21%, compared with less than 8% for the five-year average. It reached a peak of 30% during the Lunar New Year in February, when the Taiwan stock market was closed.

Many people have put it in place and hope it will return to its fair value level in the long term, said Jon Withaar, head of special situations in Asia at Pictet Asset Management. But the premium could rise further, and that would then cause a lot of suffering, he added.

TSMC's cutting-edge technology and reasonable valuation have made it a favorite stock among global AI investors. ADRs have surged 66% this year through Friday, compared with a 55% advance for Taipei stocks. Yet both are trading well below their 2021 valuation highs.

ADRs have outperformed because they are more easily accessible to foreign investors. They are also included in metrics such as the Philadelphia Stock Exchange Semiconductor Index and in exchange-traded products such as the VanEck Semiconductor ETF and iShares Semiconductor ETF, meaning funds tracking them must purchase the listed securities in the USA.

Its supply/demand dynamic, said Brian Freitas, founder of research firm Periscope Analytics. Not all foreign investors can hold Taiwanese stocks, so they simply prefer to own ADRs. Additionally, some indexes only reference the ADR, so ETFs essentially buy U.S. stocks.

Beyond that, TSMC ADRs generally trade at a premium because they are fungible, unlike Taiwanese stocks, which require special regulatory approval to convert to the U.S. equivalent. The Asian stock is also already widely held by fund managers, making it difficult for them to further increase their position.

Also read: TSMC's 42% Stock Rise Leads to Weighting Limits for Some Funds

For now though, the AI ​​sector remains hot, with Nvidia Corp. worth over $3 trillion in market value and a gauge that tracks semiconductor stocks at an all-time high. The premium of TSMC's ADRs over the local stock has climbed to an average of nearly 17% this quarter after reaching 30% in February.

The story continues

The AI ​​boom is not over, Withaar said. I'm happy to wait for a widening crescendo and perhaps even a disappearance of the panic.

Technical table of the day

Microsoft Corp., Apple Inc. and Nvidia Corp. are engaged in a fierce three-way battle for the title of the world's most valuable company. At more than $3 trillion each, these three stocks combined are now worth more than China's stock market, according to data compiled by Bloomberg. Stocks were fluctuating in early trading Monday.

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The president of Microsoft Corp. Japan, Miki Tsusaka, said that Japan has been one of the fastest countries to adopt the use of new artificial intelligence tools and has the potential to accelerate its economy and technology sector by going further away.

TDK Corp. Investors have not yet realized the full potential of the current boom in artificial intelligence, its CEO said in a rare market comment from a Japanese business leader.

Tesla Inc. has won approval to test its advanced driver assistance system on some streets in Shanghai, according to a person familiar with the matter, the next step in rolling out the feature to Chinese drivers.

Paytm is in talks to sell its cinema and ticketing businesses to Zomato Ltd., as the Indian fintech pioneer seeks to shed non-core assets and revive sales hit by a regulatory crackdown.

(A previous version of this story corrected performance in Taiwan stocks this year.)

–With help from Betty Hou, Subrat Patnaik and David Watkins.

(Updates to add stock movement in Technical Chart of the Day section.)

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