The response to all this has been a stock market frenzy, especially by foreign institutional investors. JPMorgan announced a target of 8,000 for the Taiex by year-end (the Taiex closed at 6,485 on Wednesday).The stock market peaked at near 10,000 in May of 2008 and began an immediate decline, long before the crisis in October. The pic below from Yahoo shows the last two years....
Goldman Sachs upgraded Taiwan shares in general to “overweight” this month, saying in a note, “The rapidity and scope of recent cross-strait initiatives are welcome signals that Taiwan may finally reap the economic benefits from a warmer relationship with China.”
Foreign money is adding fuel to a domestic rally that was already underway. Many investors in Taiwan had begun to bet that the island’s economy was finally starting to pull out of the doldrums. Locals have also responded warmly to the Ma government’s tax cuts (the inheritance tax was lowered from 50 percent to 10 percent, for example).
But many investors seem to have glossed over or willfully ignored the fact that many essential details remain unresolved or undisclosed.
For one, the details of which specific sectors will be open to mainland money hasn’t been finalized.
Taiwan will likely allow mainland investment in 98 industries during the first phase, including automobiles, textiles, rubber and retailing, with detailed rules probably coming at month-end, the Taiwan minister of economic affairs, Yiin Chii-ming told reporters this week. But flat panel and contract chip manufacturing will still be shut to mainland investors for now.
Then, the two sides will have to sign a memorandum of understanding, probably in June or July for stock investments, as well as separate agreements for banking and insurance.
“On the Taiwan side, the government is still keeping their cards close to their chest,” said a Standard Chartered economist, Tony Phoo. “We still don’t have details on everything we’re hearing and reading about, so there’s a lot of market speculation.”
The ballyhooed tie-up between China Mobile and Far EasTone is a good example. Some media reports have portrayed it as a done deal, but the Economy Ministry said this week that telecommunications would not be one of the first sectors opened to mainland investment.
Kevin Yang, chief investment officer at Paradigm Asset Management, added that for now, Beijing is capping Taiwan-bound investment at about 7.2 billion Taiwan dollars, or about $219 million.
“That’s very little,” he said. “I think the market’s overreacting.”
Phil Chu of Grand Cathay Securities and other analysts say foreign investors are betting that Taiwan will be another Hong Kong, where the stock market boomed following its opening to mainland investment.
“I think it’s possible Taiwan’s stock market could double by 2012,” Mr. Chu said. “But it won’t go up as much as Hong Kong’s did.”
Still, analysts see Taiwan’s opening to the mainland as helping the island’s economic recovery in the short-term, and providing a structural boost in the long-run.
China has already played a part in lifting some sectors. Its rural stimulus plan has increased mainland demand for televisions and other appliances, which has increased orders for Taiwan’s high technology companies. The Taiwanese flat-panel company AU Optronics, for example, said it expected sales to mainland television makers to rise 40 percent this year.
That has helped prop up exports somewhat, offsetting continuing weak demand from the U.S. market.
Ironically, the surge in the stock market and Taiwan dollar could actually slow a recovery by making Taiwanese products more expensive overseas.
Investors in Taiwan’s market have been burned before on exaggerated mainland hopes. Last year, for example, the market rocketed in the two months before Mr. Ma’s inauguration, only to plunge steadily afterward as the reality of the global downturn set in.
Still, Mr. Phoo and other analysts insist the long-term picture is bright. “For eight years, Taiwan kept limits on exchanges and investments,” said Mr. Chu. “But since last year, Ma Ying-jeou has steadily adopted opening policies.”
Bloomberg article on the new risks the market is facing...
“In our view, there are only a few remaining catalysts that are not fully priced in,” the strategists wrote. “On the flip side, we see more risks emerging.”Good luck!
Following the gains, the Taiwanese benchmark index is now valued at 61 times reported earnings, the second-highest in Asia after Japan, compared with its five-year average of 17 times. The market’s price-to-book multiple has also risen to 1.8 times from a low of 1.07 times set in November, HSBC said.
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