Global funds take refuge in Taiwan

TAIPEI • The best refuge from the Asian emerging- market crash triggered by China's slowdown is right next door in Taiwan.

Global funds boosted holdings of the island's equities this month, while pulling money from securities in South Korea, India, Indonesia and Thailand, exchange data shows.

The Taiex share index has gained 1.3 per cent in US dollar terms so far this month, Asia's best performer after Seoul, while benchmarks in Shanghai and Jakarta both slumped by almost 6 per cent. The Taiwan dollar, Japanese yen and Singapore dollar all gained this month as money exited higher-yielding markets.

Credit Suisse Group, JPMorgan Chase & Co and Morgan Stanley all have "overweight" recommendations on Taiwan's stocks as companies from Taiwan Semiconductor Manufacturing to Pegatron Corp benefit from strengthening US demand for tech products.

A current-account surplus running at 14 per cent of gross domestic product is also providing support for the local currency as the US Federal Reserve prepares to raise interest rates.

"Taiwan is seen as better equipped to handle the fallout from China and the Fed," said Mr Win Thin, global head of emerging-market strategy at Brown Brothers Harriman & Co in New York. "Despite slower growth, Taiwan has relatively strong fundamentals, compared to most of the emerging markets."

The prospect of a Fed rate increase is also giving a lift to the greenback, which has appreciated against 23 of 24 emerging-market currencies this year.

This benefits Taiwanese equities as 75 per cent of listed firms' revenue is denominated in US dollars, according to Mr Chung Hsu, a strategist at Credit Suisse. While China accounts for 40 per cent of shipments from Taiwan, two-thirds of these are re-exported to the US or Europe, he added.

JPMorgan and Morgan Stanley cite cheap valuations as reasons to be positive on Taiwan's shares.

The Taiex slid 12 per cent in the last two months as data showed the economy was expanding at the slowest pace since 2012 and China unexpectedly devalued the yuan on Aug 11. The benchmark gauge trades at 12.6 times reported earnings, compared with its five-year average of 17.7.

Taiwan's dollar has retreated 2.8 per cent against the greenback this year, losing ground to only the pegged Hong Kong dollar and the yuan among 24 emerging-market currencies tracked by Bloomberg. It has strengthened 0.3 per cent so far this month.

In addition to the current-account surplus, which was a record US$22 billion (S$31 billion) in the first quarter, Taiwan's currency is underpinned by US$425 billion of foreign-exchange reserves. That is the fifth-highest stockpile in the world, behind China, Japan, Saudi Arabia and Switzerland. Relatively low foreign ownership of bonds in Taiwan, where yields are the lowest in Asia excluding Japan, also adds to the resilience of the island's financial markets.

"If the US raises rates, there'll be outflow pressure for all emerging markets, but among them Taiwan will be affected less or may even benefit," Mr Hsu said from Taipei. "The precondition for US tightening is that the recovery is strong, so tech demand will be relatively good."

One risk for Taiwan is presidential and legislative elections on Jan 16. The opposition Democratic Progressive Party candidate Tsai Ing-wen is leading the polls, stoking concern that relations with China may cool as the party is more sceptical of cross-strait integration than the ruling Kuomintang.

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A version of this article appeared in the print edition of The Straits Times on September 17, 2015, with the headline 'Global funds take refuge in Taiwan'. Print Edition | Subscribe