Taiwan Stock Index Surges the Most in 14 Months on Tech Rebound

(Bloomberg) -- Taiwan stocks rebounded, posting their best gains since March last year thanks to a broader rally in chipmakers.

The Taiwan Stock Exchange Weighted Index closed 5.2% higher on Tuesday. The rally more than erased the 3% slump on Monday after the government tightened restrictions to control its worst outbreak of the coronavirus.

Chipmaker Taiwan Semiconductor Manufacturing Co. jumped 4.2% while chip designer MediaTek Inc. climbed 8.8%. The two contributed the most to the benchmark’s gains. Steel, glass and shipping were among the top-performing sectors.

Taiwan’s Taiex benchmark has fallen nearly 10% since the end of April after a surge in untraceable Covid-19 cases triggered worries over the strength of the island’s economic recovery. Taiwan Deputy Finance Minister Juan Ching-Hwa told Bloomberg News on Tuesday that the Taiwan Financial Stabilization Fund was still monitoring the market.

Morgan Stanley has downgraded Taiwan stocks to underweight, citing their more expensive valuations than other markets and high correlation with the Nasdaq. The brokerage also expects a retail investment boom in the Taiwan to cool after recent volatility against the backdrop of uncertainties over the virus outbreak as well as market demand for semiconductors.

Global tech stocks have taken a beating in recent weeks as concerns grow over higher inflation and the sector’s stretched valuations. The Nasdaq 100 Index has slid more than 5% from a record high in April. Technology stocks like chipmakers and other manufacturers make up almost 60% of Taiwan’s benchmark versus 18% for the broader MSCI Asia Pacific Index.

Compounding Taiwan’s swoon is forced selling by retail investors as they faced margin calls by brokers to cover losses in their stock accounts. The level of margin debt fell for four straight days through Friday by a combined NT$39.4 billion ($1.4 billion).

The Taiex is by far the most volatile among major stock benchmarks tracked by Bloomberg, with a measure of 10-day swings at the highest in more than a year. Stock traders are preparing for more volatility ahead, loading up on options tracking the Taiex. The cost of hedging against swings in the Taiwan benchmark rose to a 12-year high versus the S&P 500 on Monday, according to one-month options prices compiled by Bloomberg.

That said, some foreign investors are piling into the island for bargain hunting. As the rout deepened on Monday, foreign investors put NT$33.4 billion ($1.2 billion) into Taiwanese shares, the most since April 2015. They added another NT$22.1 billion on Tuesday.

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