(Feb 3): Taiwan Semiconductor Manufacturing Co (TSMC) shares tumbled by the most in nearly six months as trading resumed Monday, playing catch-up to a global selloff in artificial intelligence (AI)-linked stocks last week.

The Taipei-listed shares slid as much as 6.6%, putting pressure on the benchmark Taiex, which fell as much as 4.4%. Hon Hai Precision Industry Co slumped 9.2%. The decline comes after investors were caught off guard by news that DeepSeek’s AI model might rival leading US developers, causing a rout in chip stocks, while Taiwan’s market was closed for the Lunar New Year holiday. 

Also weighing on investors’ minds are tariff tensions. US President Donald Trump ordered general tariffs of 25% on Canada and Mexico and 10% on China, to come into effect on Tuesday. Trump also threatened sectoral tariffs including on chips, metals and drugs in coming months. 

“TSMC share prices already reflect the ADR price movement,” said Ken Wong, Asian equity portfolio specialist at Eastspring Investments. “We’re currently evaluating our positions on a few companies with Mexico production exposure, as those will be impacted the most at the beginning.”

Hon Hai said last year that it was building the world’s largest assembly site for servers, powered by Nvidia Corp’s GB200 chips, in Mexico. Other Taiwanese partners to the US AI chip designer include Inventec Corp, which also operates plants in that country. Inventec shares fell as much as 8.5% on Monday.  

The Taiwanese dollar saw the biggest intraday slump since 2015 in morning trading on Monday, weakening alongside regional peers amid a resurgent greenback and Trump’s tariff threats.

DeepSeek’s cost-effective AI model is raising doubts if companies need to incur significant amounts of capital expenditure to develop the technology. That may weigh on TSMC — the main chip supplier to Apple Inc and Nvidia Corp — which recently lifted its quarterly sales forecast on expectations of higher spending on technology and capacity this year. 

Fund managers may “reassess their overall portfolio exposure to AI, considering recent developments,” said Gary Tan, a portfolio manager at Allspring Global Investments in Singapore. “In the near term, we think it will encourage emerging market investors to look outside tech hardware and countries like Taiwan and Korea for potential AI winners.”

Pressure on TSMC, which makes up 39% of the island’s benchmark, may further accelerate foreign outflows from Taiwan. Overseas investors sold US$1.26 billion (RM5.65 billion) of local shares in the tech-heavy market in January.

A strategist at Jefferies LLC said he would reduce holdings in Nvidia and TSMC in its global long-only equity fund, given the “potentially dramatic implications” of DeepSeek.

Bulls remain hopeful, given TSMC’s cutting-edge technology and reasonable valuation. The stock is currently trading at around 18 times forward earnings, in line with its five-year average. It’s also cheaper than Intel Corp’s 32 times and Nvidia’s 27 times as of Friday’s close. 

Companies that recently reported results, including Advantest Corp and ASML Holding NV, have indicated that demand remains strong with elevated spending around AI. That should provide some support for TSMC. 

While certain products may experience short-term order headwinds after the emergence of DeepSeek, “low-cost models may drive broader adoption, spurring faster demand for AI inference chips largely reliant on TSMC to manufacture, boosting long-term growth,” Charles Shum, an analyst at Bloomberg Intelligence, wrote in a note.

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