Taiwan Semiconductor ADR premium over Taiwan stocks hits a 16-year high! Analysts warn it may indicate overheating in the U.S. stock market
The price gap between TSMC's American Depositary Receipts (ADR) and its stocks listed in Taipei has reached a new high in 16 years, with analysts warning that this may indicate overheating in the U.S. stock market. Data shows that the premium for TSMC ADR in July was 24%, significantly higher than the ten-year average of 7.4%. Analysts point out that increased investor attention on TSMC's role in the global AI supply chain has led to a rise in ADR demand, while supply remains relatively fixed, causing the premium to widen. This phenomenon may suggest a bubble risk in the U.S. market
According to Zhitong Finance APP, the price gap between TSMC (TSM.US) American Depositary Receipts (ADR) and its stocks listed in Taipei has surged to the highest level in over 16 years, raising concerns in the market about the potential overheating of the artificial intelligence boom. Data shows that TSMC's ADR had an average premium of 24% in July compared to its locally listed stocks in Taiwan, up from 17% in April and the past decade's average of 7.4%. Although TSMC's ADR has historically had a premium over its Taipei-listed stocks, the price difference in July has now reached the highest level since April 2009.
Vincent Fernando, Executive Director of investment research firm Zero One, stated: “On one hand, investors are increasingly focused on TSMC's critical role in the global AI supply chain, significantly boosting demand for its ADR in the U.S. market. However, at the same time, the supply of ADRs is relatively fixed, with limited room for new issuances, and conversion operations have become more difficult. This has led to an expanding trading range for ADR premiums.”
The historical premium of TSMC's ADR can be attributed to two main reasons: first, they are interchangeable (freely tradable between markets), while converting Taiwanese listed stocks to their U.S. versions requires special regulatory approval; second, they are included in indices such as the Philadelphia Semiconductor Index, which means that exchange-traded funds (ETFs) tracking these indices must purchase their ADRs.
Since the release of ChatGPT in 2022, TSMC's ADR has risen over 190% as of Thursday, while the company's stocks listed in Taipei have increased by less than 140%. During this period, the foreign ownership ratio of the latter has risen to nearly 74%, but still below the historical record of 80% set in 2017.
Market observers, including Owen Lamont, a portfolio manager at Acadian Asset Management, view this widening price gap as a cautious signal. Owen Lamont stated: “When the U.S. ADRs of popular tech companies show excessive premiums compared to their local stocks, it often signals a bubble in the U.S. market. I see many signs of overheating in the current market.”
