Intensifying Chinese pressure on Taiwan is prompting some equity investors to buck the trend and exit Taiwan Semiconductor Manufacturing Co.

Martin Currie’s Zehrid Osmani began winding down his TSMC position early last year and was fully divested by May. Shelton Capital Management’s Bruce Kahn started selling TSMC shares last October and eliminated his stake by January, while Sydney-based hedge fund Plato Investment Management said it’s “nervous” about the world’s largest foundry business.

At the same time, Martin Currie and Plato are among those finding an alternative in ASML Holding NV, a crucial TSMC supplier.

These are bold bets when considering TSMC was the most widely held Asian stock among the world’s 40 largest actively managed global equity funds as recently as July, according to Morgan Stanley’s analysis. The company’s stock is up 22% this year, outperforming ASML’s near 10% gain.

Because the bulk of TSMC’s operations are in Taiwan, it faces heightened geopolitical hazards, said Osmani, who helps oversee $3.2 billion as head of Martin Currie’s global long-term unconstrained team. ASML, on the other hand, benefits from the “technological fragmentation that the geopolitical risk brings,” he said.

While few fund managers expect military action, the situation remains high on their list of concerns, particularly because Taiwan is so important for US-China relations. For some, including famed US investor Warren Buffett, the possibility of conflict overrides enthusiasm about TSMC’s market-dominating chip business.

Read More: Buffett Exits TSMC While Hedge Funds Coatue, Tiger Global Buy

By contrast, Netherlands-based ASML is relatively sheltered, with clients including Intel Corp. and Samsung Electronics Co. The company provides lithography machines that are used in the production of chips.

David Allen, head of long-short strategies at Plato Investment, which manages A$11 billion ($7 billion), avoids TSMC and said he’s long ASML.

TSMC is “an incredible company, but if things deteriorate from a sovereign perspective, who knows what’s the right valuation for the company,” Allen said.

Bruce Kahn, who runs the $159 million Shelton Sustainable Equity fund, has sold TSMC. There’s too much geopolitical friction that isn’t currently reflected in the company’s market valuations, similar to how investors weren’t prepared for Russia’s invasion of Ukraine, he said.

“People don’t think anything is going to happen,” Kahn said. “But that’s the problem with risk, you don’t think anything is going to happen until it does.”

Read More: Corporations Are Picking Sides in New Era of Economic Upheaval

These stock bets are facing challenges in panning out as expected. According to their latest earnings releases, ASML’s orders plunged in the third quarter and left the company more reliant on revenue from China, while TSMC’s quarterly sales outlook beat analyst estimates. And both companies remain in the cross-hairs of US-China chip tensions.

BlackRock Investment Institute’s geopolitical risk dashboard has a “high” risk rating for US-China relations, citing Taiwan as the “biggest flashpoint.”

As of Oct. 18, foreign investors have sold more Taiwanese stocks this year than they’ve bought, erasing almost $8 billion of inflows over January and February. Outflows aren’t unique to Taiwan. Most emerging markets in Asia have seen a foreign exodus from equity markets this year, largely caused by the series of interest rate hikes by the Federal Reserve.

Read More: TSMC’s Control Over Its Destiny Is Slipping Away: Tim Culpan

TSMC has been building its presence abroad to counter risks from the escalating cross-strait risk. In August, it agreed to build a €10 billion ($11 billion) plant in eastern Germany with Infineon Technologies AG, NXP Semiconductors NV and Robert Bosch GmbH. The German government will provide as much as €5 billion of subsidies for the factory, which will be 70% owned by TSMC.

The chipmaker has separately committed to spend $40 billion to build two facilities in Arizona, and is seeking up to $15 billion of subsidies from the US. It’s constructing an $8.6 billion plant in Japan with support from the government in Tokyo, as well as Sony Group Corp. and Denso Corp.

TSMC’s diversification may drive “diseconomies of scale” in spite of the subsidies, as dispersed operations lead to higher unit costs, Osmani said. Meanwhile, ASML, which supplies the machines TSMC needs to produce its chips, will benefit from TSMC’s foreign expansion, he said.

For ASML, it means “opportunities to actually ship more equipment to more of the sites across the different regions,” Osmani said. That results in “better scale benefits, and therefore better profit opportunities.”

--With assistance from Amy Bainbridge.

Author: Sheryl Tian Tong Lee, Ishika Mookerjee and Bei Hu