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Foreign Investors Flock to Taiwan Tech; Surge of Overseas Cash Sends Stock Index to Highest Level Since 2007

Foreign Investors Flock to Taiwan Tech

Surge of Overseas Cash Sends Stock Index to Highest Level Since 2007

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ARIES POON and FANNY LIU

June 19, 2014 4:34 a.m. ET

TAIPEI—A surge of cash into Taiwan has sent stocks to their highest level since 2007, as enthusiasm grows over the island’s technology companies.

Global money managers have pumped in $9.6 billion so far this year, more than three times the $2.7 billion total for all of 2013. It is the fastest pace since 2009, and puts Taiwan second only to India among Asian destinations for foreign funds, according to Credit Suisse CSGN.VX -1.36%

Wednesday was the biggest single day for foreign buying since last July, as overseas investors snapped up a net 17.1 billion Taiwan dollars ($570 million) in shares.

With recovering U.S. and European economies and new gadgets slated fromApple AAPL -0.35% Inc. and Sony 6758.TO +0.18% Inc. this year, Taiwan’s technology component makers are benefiting from their central role in the global electronics supply chain. Analysts expect a bigger-screen iPhone 6 later this year, while faster smartphones from other brands are set to increase demand for components from Taiwanese factories.

“We’ve been adding new positions in Taiwan stocks…many of which are very well positioned to gain from electronic-product launches later this year, particularly the Apple products,” said James Yeh, a Taipei-based executive director of J.P. Morgan Asset Managementwhich in Asia oversees US$491 billion of assets.

One big beneficiary is Taiwan Semiconductor Manufacturing Co. 2330.TW -0.40%, the world’s biggest contract chip maker by revenue and the largest listed company in Taiwan. It expects record revenue and net profit this year as it starts to produce chips for Apple, which is reducing its reliance on South Korea’sSamsung Electronics Co. 005930.SE -1.81% for components. TSMC shares, upgraded by analysts in March, have surged 19% this year.

That has driven the benchmark Taiex up 8.2% over the same period. Thursday, the index rose 0.4% to 9316.81, the highest close since November 2007.

Even when Apple turns to mainland Chinese factories for components such as touch screens and camera lenses, or to assemble iPads and iPhones, the factories are frequently those of Taiwanese companies like Hon Hai Precision Industry Co. 2317.TW +0.96% Known as Foxconn, the stock has rallied 17% this year ahead of the expected launch of the iPhone 6. For years the sole final assembler of iPhones, Foxconn now shares the role with another Taiwanese company, Pegatron Corp. 4938.TW -0.18%

“Those guys in an oligopolistic structure are doing very well,” said Khiem Do, head of Asian multi-asset investment at Baring Asset Management, which has $59.4 billion of assets under management. Mr. Do said he this year has increased his exposure to Taiwanese stocks, especially technology companies.

Taiwan tech companies also offer a price edge, trading at around 14 times forward earnings, a common valuation measure, compared with about 16 times for U.S. equivalents. This makes Taipei’s tech stocks cheaper proxies for investing in the Nasdaq, fund managers said.

“Taiwan’s tech stocks are not expensive from a valuation point of view. Foreign funds are expected to keep flowing into Taiwan stocks and push them to rise further,” said Yonghao Pu, UBS UBSN.VX -1.61% chief investment officer for North Asia.

Taiwan is also benefiting as money managers retreat from China, where growth is slowing, and Japan, where stocks are down 5.7% this year.

“Within the region, Taiwan is a more defensive market offering reasonable valuations coupled with an earnings recovery. Corporates here are also starting to pay dividends, which is another catalyst,” said Wallace Ko, head of the Taiwan equity business and a managing director at Morgan Stanley MS -0.37%

Of course, this year’s rally has made the island’s stocks less inexpensive, and But some say the big technology companies are vulnerable as they compete on cost.

“The market has done well recently and is not cheap,” notes Matthew Vaight, emerging-markets fund manager atof M&G Investments, which has over $400 billion in assets under management. It is underweight Taiwanese stocks, meaning it has less invested in them than called for by the benchmarks against which it tracks its performance.

“Taiwanese companies need to work harder on innovation to develop competitive and product advantages that enable them to keep more of the value from the goods they produce,” Mr. Vaight said.

For now, though, many see further room for stocks to rise. There is even speculation the government will buy stocks ahead of November municipal elections to sustain the Taiex and keep sentiment regarding the economy strong. Simon Liu, deputy chief investment officer at Yuanta Polaris International Securities Investment Trust, Taiwan’s biggest local fund house, expects the Taiex to hit 10000 by the end of this year.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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