Chart of the Week: Chipmakers are expensive globally

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Good morning. This week we look at global market valuations, using both forward price/earnings ratios (which use estimates for the coming year’s earnings in the denominator) and cyclically adjusted price/earnings (“Cape”) ratios (which use 10-year historical average earnings in the denominator). On both forward and historical measures, the tech- and AI-heavy US and Taiwan markets look expensive relative to most other major areas. In contrast, the UK and Europe look cheap.

Korea is an interesting outlier. Thanks to the skyrocketing earnings of the memory chip giants Samsung Electronics and SK Hynix, its forward price/earnings ratio is low — because earnings are expected to be so high next year. Valuations also remain low because of corporate governance concerns, which policymakers have been working to remedy. But its Cape ratio, which uses historically normal earnings, is an expensive-looking 35. Taiwan, which looks especially expensive because of the heavy weighting towards Taiwan Semiconductor Manufacturing Company, has a sky-high Cape ratio of 49.

If AI delivers on its economic promise in coming years, the high valuations shouldn’t be too much of a worry. If, however, returns on AI investment are low, the AI-heavy markets could see big corrections. Send us your thoughts: [email protected].

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As a programming note, Unhedged: Chart of the Week will be off next Saturday for the July 4 holiday. We’ll be back in your inboxes on July 11.

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