Taiwan shares hit record highs on the AI boom — and it may not be too late to join the party

Taiwan shares notched fresh all-time highs on Friday as a booming demand for artificial intelligence and semiconductor technology boosts investor optimism for the country's tech firms.

Market watchers expect the rally in Taiwan stocks to strengthen further.

The Taiwan Weighted Index hit an intraday high of 20,296 before paring gains, according to data from Factset. It could go up to 24,000 before the year ends, according to Paul You, chairman of First Securities Investment Corporation.

The global demand for AI has been robust in the past two to three months and remains "very promising," You said.  Asia-Pacific's tech sector has been expanding on the back of the semiconductor boom even as other industries struggle amid global macro uncertainty.

That's setting the stage for an economic boom for the island, which boasts the "strongest supply chain for AI service manufacturing," according to You.

Chip giant TSMC, which is the primary contract chip manufacturer for Nvidia, has soared more than 30% so far this year, benefiting from Nvidia's performance and potential. TSMC is the largest component of the Taiex.

Shares of equipment assembly firms in Taiwan such as Quanta Computer and Wistron Corporation have also surged more than 14% and 24%, respectively, this year, according to data from LSEG.

Another reason for the rally in Taiwan stocks is the increase in fixed asset investment since elections ended in January, which had lended some uncertainty, said Natixis' Chief Economist for Asia Pacific, Alicia Garcia-Herrero. She too said that the AI boom will further fuel the rally.

"I would expect a very strong year, stock market wise, and also because we're expecting cuts from the Fed," she added.

A Fed cut usually offers a lift for equity markets as lower interest rates mean cheaper borrowing costs for businesses and individuals.

Taiwan stock exchange hit new highs

Moving away from the spotlight of the superstar sectors such as semiconductors and AI, You also said that some domestic sectors such as Taiwan's precision machinery, automation technology and consumer sectors remain undervalued.

Some rotation into these sectors may be needed to push the benchmark index towards a new all-time high, he added. Sector rotation involves the movement of money from one industry to another in anticipation of the next stage of an economic cycle.

"So I believe if we [are] marching to 24,000, you need to add some sector rotation," he said.

In spite of the strong headline index performance, Taiwan's "market breadth has been narrow" since less than half of Taiwan stocks have delivered positive returns year to date, Goldman Sachs said in a recent note.