Taiwan's stock market has surged, surpassing the market capitalization of France, Britain, Canada, and India to become the world's fifth-largest, primarily driven by the artificial intelligence (AI) wave and a boom in AI chip and server exports. Despite this growth, the market faces four major risks, including an extreme concentration, with TSMC (Taiwan Semiconductor Manufacturing Co.) accounting for approximately 41.7% of the market's capitalization as of June 26, 2026. This concentration exceeds the American Magnificent Seven's roughly 35% share of the S&P 500, a situation exacerbated by regulations allowing mutual funds and actively managed ETFs to hold up to 25% of their portfolios in a single stock.
Another significant risk comes from Exchange Traded Funds (ETFs), particularly actively managed ones, which amplify both upward and downward market trends. These funds, seeking better performance, heavily invest in strong performers, leading to self-perpetuating price increases. This has resulted in a rapid increase in the number of stocks priced at NT$1,000 or more per share, reaching around 50. The market is also experiencing massive leveraging by the public, with outstanding debt for stock purchases and pledged stock collateral reaching all-time highs. This has led to what some call "four-loan households," where individuals borrow against their homes and personal loans to invest in the market, creating a growing mountain of retail investor debt.
While foreign institutions like Morgan Stanley have increased investment in Taiwan and brought in hundreds of foreign institutional investors, the underlying risks are concerning. Analysts have repeatedly warned that the retail investors' obsession with day-trading and leverage could trigger a national financial crisis. South Korea's market also exhibits similar issues, with billions in leveraged bets on AI-related stocks like Samsung Electronics and SK Hynix, which together account for over half of the KOSPI. This has made the market volatile and detached from fundamentals, leading to concerns from institutional investors and regulators, who have attempted to curb excesses by increasing cash balance requirements for single-stock leveraged ETFs.
