The single stock holding limit for funds has been relaxed to 25%, triggering a rally across the Taiwan stock market, with TSMC's share price reaching a new high.

The single stock holding limit for funds has been relaxed to 25%, triggering a rally across the Taiwan stock market, with TSMC's share price reaching a new high.

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Financial regulators in Taiwan have relaxed the cap on fund holdings in individual stocks, triggering a broad rally in the Taiwan stock market, with TSMC shares hitting a record high.

On Friday, the Taiwan Financial Supervisory Commission announced plans to raise the holding limit of a single stock in local equity funds and actively managed ETFs from 10% to 25%. Boosted by this news, TSMC's share price rose as much as 4.8% during the session, setting a new record, and the Taiwan Weighted Index surged up to 3.2%, becoming the strongest performing major stock index in Asia that day.

J.P. Morgan believes that this policy adjustment may bring over $6 billion in new capital inflows to the Taiwan market, and predicts the Taiwan Weighted Index could rise to 40,000 points, implying around 6% upside from Thursday's closing price. Meanwhile, shares of Taiwanese substrate companies all hit their daily limit up, and market sentiment heated up across the board.

Relaxed policy directly benefits TSMC

The core beneficiary of this regulatory adjustment is TSMC. Driven by the ongoing boom in AI, TSMC's share in the Taiwan Weighted Index has exceeded 44%, and its weight in the MSCI Emerging Markets Index has reached 13%. The previous 10% cap on holdings in a single stock meant that many local funds could not fully participate in TSMC's rally.

Vey-Sern Ling, Managing Director at Union Bancaire Privee, said, "Now that the cap has been raised to 25%, these local funds will buy more TSMC." He also pointed out that this move will eventually help narrow the price gap between TSMC's Taipei-listed shares and its US ADRs—a discount partly due to special regulatory approval required to convert Taiwan shares to ADRs, while there are no such restrictions in the US market.

This rally was not limited to TSMC alone. Many major Taiwanese substrate companies also hit their daily limit up, including Kinpo Electronics, which rose 9.88%, Nan Ya PCB up 9.94%, and Unimicron Electronics up 7.28%. The observer also noted that the Taiwan Stock Exchange may need to consider expanding daily price movement limits.

Concentration risk remains a concern

Despite the strong market sentiment, analysts also pointed out potential risks. With TSMC's weight in the Taiwan Weighted Index exceeding 44%, this policy adjustment will further intensify concentration risk in the Taiwan market. Analysts have previously warned that large swings in TSMC's stock could drag down the entire market, and increasing the holding limits will further strengthen this correlation.

Meanwhile, J.P. Morgan strategists have upgraded their rating on Taiwanese stocks to overweight, citing eased concerns over the monetization challenges of AI and continuous improvements in hardware pricing, which provide extra support for the fundamentals of Taiwanese equities.

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