Following the relaxation of single-stock holding limits for funds by Taiwan's financial regulator, shares of Taiwan Semiconductor Manufacturing (TSM.US) surged to a record high. J.P. Morgan estimates this move could attract over $6 billion in inflows. The chip manufacturing giant's stock rose as much as 4.8% during the session, while the benchmark Taiwan Weighted Index also jumped 3.2%, leading gains in Asian markets.
Taiwan's Financial Supervisory Commission announced on Thursday plans to ease a long-standing rule that previously limited fund managers from investing more than 10% of a fund's net asset value in a single stock. Under the new regulation, local equity funds and active exchange-traded funds (ETFs) investing in Taiwan-listed stocks can now allocate up to 25% of their net assets to any single company listed on the Taiwan Stock Exchange with an index weighting exceeding 10%.
As the artificial intelligence (AI) boom continues to drive up the share price of Taiwan Semiconductor Manufacturing, the previous 10% ceiling had increasingly become a constraint, preventing many funds from fully benefiting from the stock's rise. J.P. Morgan's sales team noted in a report that this adjustment could push the Taiwan Weighted Index towards the 40,000-point mark, implying an approximate 6% upside from Thursday's closing level.
Given that Taiwan Semiconductor Manufacturing accounts for over 44% of the Taiwan Weighted Index and 13% of the MSCI Emerging Markets Index, the regulatory easing also increases concentration risk in the Taiwan market. Some analysts worry that a significant decline in the stock could drag down the broader market.
This rule change may help narrow the discount between Taiwan Semiconductor Manufacturing's Taiwan-listed shares and its American Depositary Receipts (ADRs). The discount exists because, unlike U.S. stocks, Taiwan-listed shares require special regulatory approval for conversion into ADRs.
"Now that the ceiling has been raised to 25%, these local funds will buy more Taiwan Semiconductor Manufacturing," said Ling Vey-Sern, Managing Director at Union Bancaire Privee. He added that this should ultimately narrow the discount.
Concurrently, J.P. Morgan strategists upgraded their rating on Taiwan stocks to "overweight," citing eased concerns over earnings realization challenges and strengthening pricing power in the hardware sector.
Notably, on April 16, Taiwan Semiconductor Manufacturing released its first-quarter 2026 financial report, delivering results that exceeded expectations across the board. Key financial data showed Q1 consolidated revenue reached NT$1.134 trillion (approximately $35.9 billion), a 35% year-over-year increase. Net profit surged to NT$572.48 billion (approximately $18.2 billion), a 58% year-over-year jump, surpassing the average analyst estimate of NT$542.4 billion. This marked the fourth consecutive quarter of record profits and the eighth consecutive quarter of double-digit growth.
The gross margin also reached a record high, with the Q1 gross margin rising to 66.2% (compared to the company's previous guidance of only 63%-65%). The operating margin climbed to 58.1%, both figures significantly exceeding market expectations.
Regarding the closely watched performance outlook, the guidance provided by Taiwan Semiconductor Manufacturing's management comprehensively surpassed expectations, even though market forecasts had been repeatedly revised upwards. The company now expects total revenue growth for the year to exceed 30%, higher than its previous forecast of below 30% and the market consensus of 25%-28%. Company executives also stated that, given persistently strong demand for AI chips and advanced packaging, capital expenditure is expected to be near the upper end of the previously forecast range (up to $56 billion). They emphasized that capital expenditure over the next three years will be significantly higher than in the past three years, indicating strong confidence in future growth prospects.
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