Investors Cheer Best Asia Stock Market a Year Into Tsai Rule

(Bloomberg) -- One year into Taiwan President Tsai Ing-wen’s rule, investors are tallying up their winnings.

The island’s benchmark stock index has surged 33 percent in U.S. dollar terms since Tsai’s inauguration, the best performance among Asian peers. Foreign funds in particular have been fans: they’ve pumped a net $16.5 billion into Taiwan equities in the past 12 months, the most in the region -- helping send the currency to highs last seen in 2014.

The gains overcame concern that relations with China, which had warmed under Tsai’s predecessor, would deteriorate under a Democratic Progressive Party government perceived as less friendly to Beijing. Instead, optimism about iPhone sales and a surge in global technology shares supercharged Taiwan’s $1.1 trillion stock market, which is dominated by Apple Inc. suppliers.

While challenges to the rally are mounting -- with the inflated currency starting to crimp exporter profit growth -- a strengthening economy and inexpensive
valuations are seen supporting further gains.

“One year ago, there were worries about the impact on cross-strait relations and consequently on the economy if the DPP came to power,” KGI Securities Investment Advisory Co. Chairman Tu Jin-lung said by telephone. “But President Tsai gets at least a B+ in her first year in office if you take the stock market gains and currency strength as a showcase for the economy.”

While Tsai has avoided making any concrete commitments to Beijing’s ‘One China’ policy that governed relations between the two rivals during Ma Ying-jeou’s presidency, that doesn’t appear to have hurt trade that’s vital to the island’s economy. Government figures show little change to the roughly 40 percent of Taiwan’s exports that have gone to China since 2007.

Investors are also focused on whether Apple’s next iPhone can meet such high expectations, with the benchmark equity gauge having reclaimed the 10,000 mark for the first time since the dotcom bubble in 2000.

Taiwan Semiconductor Manufacturing Co., Apple’s main chip-maker, has surged 37 percent in the past 12 months to take its market value above $170 billion. Hon Hai Precision Industry Co., which assembles the iPhone, has jumped 51 percent. The two stocks together account for almost a quarter of the Taiex’s total weighting, meaning any disappointment in terms of sales could quickly take the market lower.

A surging currency also risks eroding the island’s competitiveness, with exports accounting for more than half of the island’s gross domestic product. The Taiwan dollar has gained 8.4 percent since Tsai’s inauguration, making it one of the world’s top-performing currencies.

Hon Hai reported earnings that missed estimates after the stronger currency squeezed profit, while TSMC also failed to meet sales expectations for the first quarter. The central bank has stepped back from intervening in the currency market over the past year amid criticism from the U.S. Treasury Department.

Yet market watchers remain upbeat. Fuh Hwa Securities Investment Trust Co., Taishin Securities Investment Trust Co. and President Capital Management Corp. all project the stock index may climb to 10,800 or higher this year, supported by valuations and dividend yields. Even after the rally, the Taiex trades at 15 times reported earnings, a 10 percent discount to its five-year average, while its dividend yield of 3.7 percent is among the highest in Asia.

“In the past, the market started to fall after reaching 10,000, but it’s different this time,” said Fuh Hwa Securities Vice President Stevie Chou, whose firm manages NT$109 billion ($3.6 billion). “The electronics sector’s peak season is in the third quarter. Seasonally, cyclically, earnings-wise, valuation-wise, the market is still at fair levels.”

--With assistance from Chinmei Sung and Adela Lin

To contact the reporter on this story: Yu-Huay Sun in Taipei at ysun7@bloomberg.net.

To contact the editors responsible for this story: Richard Frost at rfrost4@bloomberg.net, Samson Ellis at sellis29@bloomberg.net, Philip Glamann, Emma O'Brien