Julius Baer, which oversees about $205 billion in client assets, is re-evaluating its “underweight” rating on Taiwanese equities and may buy airlines and hotel companies, Lee Boon Keng, head of the firm’s investment solutions group in Singapore, said by phone yesterday. Two-year bonds may rally as overseas investors buy Taiwan dollar-denominated assets to profit from a stronger currency, said Samson Tu, who helps manage $1.6 billion of fixed-income securities at Uni-President.
The Taiex Index (TWSE), the island’s benchmark stock gauge, fell 0.3 percent to 7,159.78 as of 9:32 a.m. local time, as European debt concerns dragged the MSCI Asia Pacific Index (MXAP) down by 1.3 percent. The gauge rose 1.1 percent earlier. Taiwan’s dollar was little changed at NT$30.017 after advancing 0.1 percent, according to Taipei Forex Inc. The yield on 1 percent notes due January 2017, the most-traded securities, fell 1 basis point to 0.961 percent, prices from Gretai Securities Market show.
“In Ma’s second term, we could see not only continuation but probably an acceleration of cross-strait economic links and that will certainly be positive for the market,” Peter Kurz, Citigroup’s head of Taiwan research, said in a telephone interview yesterday. His team was ranked first for Taiwanese research by Institutional Investor from 2008 to 2010.
Closer Ties
Ma, the 61-year-old leader of the ruling Kuomintang Party, won a second four-year term as president after defeating Tsai Ing-wen, chairwoman of the Democratic Progressive Party, in Jan. 14 elections. Ma’s first term was characterized by the pursuit of closer ties withChina through trade agreements and the ending of a six-decade ban on direct air, sea and postal links.
China regards Taiwan, ruled separately since the end of a civil war in 1949, as its own territory and mainland officials had warned that relations would suffer if Tsai won the weekend election. The DPP’s Chen Shui-bian had pushed for Taiwan’s recognition as a sovereign nation during his presidency that ended when Ma took office in 2008.
Ma won 51.6 percent of the votes cast to Tsai’s 45.6 percent, Taiwan’s Central Election Commission reported on its website. The commission said 74.4 percent of 18 million eligible voters cast ballots.
Options traders already anticipated Ma’s victory, placing increasingly bullish bets earlier this month on an exchange- traded fund tracking Taiwan stocks. The ratio of calls to buy the iShares MSCI Taiwan Index Fund versus puts to sell rose on Jan. 6 to the highest level since March 2008, two months before Ma was sworn in for his first term.
Foreign Investors
The Taiex reached an eight-week high on Jan. 11. The local dollar touched NT$29.880 on Jan. 12, the strongest level since Nov. 1. Benchmark 10-year bond yields declined two basis points last week to 1.29 percent, the lowest in emerging markets, and less than any of the 47 major sovereign issuers except Switzerland’s 0.70 percent andJapan’s 0.94 percent.
“Ma’s win has eliminated worries and uncertainties in the bond market,” Uni-President’s Tu said by phone yesterday. “Two-year bonds may rally as foreign investors may buy Taiwan dollar assets to profit from a currency rally.” His firm is a unit of Uni-President Enterprises Group, Taiwan’s biggest food company.
Ma was backed by Taiwanese executives who have said his cross-strait policies have boosted investment and helped the island’s economy grow. Terry Gou, chairman of Apple Inc. supplierFoxconn Technology Group (2317), predicted in a Jan. 14 interview with local television station TVBS that a Ma victory would cause a stock rally today.
Economic Cooperation
The Taiex Index has matched the performance of the MSCI Asia-Pacific Index of equities under Ma, whereas it lagged behind under Chen’s rule. Since Ma became president, the Taiwanese gauge is down about 24 percent, against the 26 percent drop for the MSCI measure. During Chen’s presidency, the Taiex rose 1.9 percent, while the regional index climbed 35 percent.
China and Taiwan signed an economic cooperation agreement in 2010, paving the way for the island’s financial services companies to expand their businesses on the mainland. Taipei- based Fubon Financial (2881) Holding Co., Taiwan’s second-largest financial services company, lost 3 percent as of Jan. 13 since Ma’s inauguration on May 20, 2008, less than the Taiex index’s 23 percent slump.
The removal of travel restrictions helped the number of Chinese tourist arrivals to jump 68 percent to 1.63 million in 2010, overtaking Japan as Taiwan’s biggest source of visitors.
Clear Outcome
Shares of Formosa International Hotels Corp. (2707), Taiwan’s largest hotel operator, retreated 4.9 percent as of Jan. 13 since Ma’s inauguration. The Taipei-based company’s shares are valued at 26.4 times estimated profit, compared with the Taiex’s multiple of 12.8. Fubon Financial trades at 10.6 times.
“The fact that the outcome is clear, the KMT not only won, but with a convincing majority, clearly it will allow for a fairly strong market rally in the short term,” said Citigroup’s Kurz, who is favoring technology companies. He’s maintaining his target for the Taiex to rise to 8,200 this year, 14 percent above last week’s close.
China’s Taiwan Affairs Office said in a statement issued through the Xinhua News Agency that Ma’s victory shows that the “peaceful development of cross-straits ties” in the last four years was “the correct path that has won the support of the majority of the Taiwanese compatriots.”
Financial markets slumped after the DPP’s Chen won the presidencies in 2000 and 2004. The Taiex fell 9.4 percent in the two days following his second victory, after he was shot while campaigning in his hometown of Tainan. The government bought stocks and the currency to stem losses.
‘A Rat’
A government-backed stock stabilization fund also supported the market in March 1996 when China test-fired missiles within about 30 miles of Taiwan’s two biggest ports in an attempt to intimidate people to vote against former President Lee Teng-hui, who published a state-to-state relations doctrine that led China to brand him “a rat.”
Europe’s debt crisis may still drag on Taiwanese equities in the next 12 months, said Jessie Zhang, manager of the Polaris Taiwan Top 50 Tracker Fund, the island’s largest fund.
“We are still an export-oriented economy,” Zhang said by phone from Taipei yesterday. “Ultimately, if the euro-zone crisis were to continue, any stock gains will be limited.”
Global equity markets lost more than $6 trillion in value last year as Europe’s debt woes and slowing economic expansion worldwide weighed on investor demand for riskier assets. Morgan Stanley said in a report on Jan. 13 Taiwan’s stocks will be “susceptible” to declines whatever the outcome of the elections this weekend as global economic concerns remain.
Stronger Finances
Taiwan’s dollar, the second-best performer in Asia in the past three months, advanced 0.3 percent in 2011, a third year of gains as investors favored economies with the strongest finances as Europe’s crisis worsened. The island’s debt is 33 percent of gross domestic product, half the ratio of the U.S., and its $386 billion foreign reserves are the fifth largest.
“In the long run, the continuation of Ma is positive for the country and the region; the economic cooperation between China and Taiwan should continue to develop,” Wee-Khoon Chong, a Hong Kong-based fixed-income strategist at Societe Generale SA, said by telephone yesterday. “The near-term optimism and long-term prospects are both positive for the Taiwan dollar.”
Chong recommends taking a long position on the currency versus a basket split between theU.S. dollar and the yen. A long position profits when an asset rises in price.
Ma’s election victory is conducive to the economic development of the island and China, Justin Lin, the World Bank’s chief economist, said in Beijing yesterday.
Largest Trading Partner
China passed the U.S. as Taiwan’s largest trading partner in 2002. Two-way trade reached $160 billion last year, according to Chinese customs statistics, a 10 percent increase from a year earlier. Under the first trade accord signed by the two sides in 2010, China agreed to open markets in 11 service sectors such as banking and to cut duties on Taiwanese imports worth $13.8 billion in 2009, or about 16 percent of the total.
Exports rose 0.6 percent from a year earlier in December, the slowest pace in 26 months, finance ministry data show. The central bank left its benchmark rate unchanged at 1.875 percent for a second straight quarterly meeting last month. The government cut its 2011economic expansion forecast to 4.5 percent and said growth will slow to 4.2 percent this year, after a 10.7 percent expansion in 2010.
Ma’s election victory “certainly will have a positive impact given what the Taiwanese have voted on really is to have a closer relationship with China,” Julius Baer’s Lee said. “Had the DPP won, it would be a destabilizing development. This is a step in the right direction.”
To contact the reporters on this story: Weiyi Lim in Singapore at wlim26@bloomberg.net;Andrea Wong in Taipei at awong268@bloomberg.net.
To contact the editors responsible for this story: Darren Boey at dboey@bloomberg.net; Sandy Hendry at shendry@bloomberg.net.
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