Taiwan’s stock market has been a relative underperformer in the Greater China region this year, compared to China and Hong Kong.
But Emil Wolter, Head of Regional Strategy for Asian Equities told CNBC, Taiwan is now at an early stage of a multi-year bull market that’s likely to peak at twice its current level in 2 years.
The Taiex, he says, could hit 20,000 by 2013 compared to its current level of 8747.
“Taiwan is in an extremely interesting situation. The market has been out of favor for the past 20 years, because of an enormous domestic bubble that peaked around 1990. Of course, Taiwan has a large tech component, and the bursting of the tech bubble in 2000 didn’t help.”
“But all these is now water under the bridge. I think Taiwan’s prospects are actually very bright, and vastly underestimated by most investors,” said Wolter.
Taiwan’s Engines of Growth
The catalysts for growth: Taiwan’s twin engines of economic integration with China and the technology up-cycle.
The revival of Taiwanese economy is helped not just by the island’s exports and industrialization, but also by its domestic service sector.
“Appetite for investments amongst the businesses that operate on-shore is increasing. Credit cycles are accelerating, and this in turn, will boost domestic consumption.”
Shane Oliver, Head of Investment Strategy and Chief Economist at AMP Capital Investors agrees.
Taiwan’s growth prospects are healthy, as the global recovery continues to boost demand for the island’s IT products. Data out this week shows Taiwan’s exports rose 27.3% from a year ago in February, much faster than January’s 16.6% gain.
And while Taiwan benefits from closer ties with China, the island doesn’t need to grapple with steep inflation like the mainland. CPI for February grew at just 1.3% year on year.
“This is one country that doesn’t have much inflation. The central bank does not need to get overly aggressive. The market is still in a sweet spot and is certainly worth overweighting,” said Oliver.
With a forward price to earnings ratio of about 13 times, valuations for Taiwanese stocks are also not too pricey
Besides potential gains, there’s another good reason to bet on the island’s equities: the weak Taiwan dollar.
Daniel Hui, senior FX strategist at HSBC says the Taiwan dollar is one of the most undervalued currencies in Asia, and is likely to appreciate this year.
Wolter of RBS agrees, and recommends that investors, who go long on the island’s stock market, should leave their positions un-hedged to benefit from this appreciation.
Taiwan: A Treasure Island?
With such attractive themes driving the Taiwan market, RBS has come up with a basket of stocks, it's calling 'treasures' for investors interested in Taiwan.
Tech continues to be hot because of pent-up demand from Western economies.
RBS estimates that operating margins for Taiwan tech firms have stabilized at around 12% due to cost cutting and consolidation.
The company’s top pick is the world’s largest contract chipmaker TSMC, which has an impressive operating margin of nearly 38%.
On average, Taiwan tech firms have a return on equity of about 21% over the past 5 years. Strong cash holdings provide tech companies with the ability to act upon opportunities, and weather bad times.
But the big money to be made, said Wolter, is in financial stocks, such as Mega Financial and ChinaTrust.
“This is a sector that has been shunned by most investors. Taiwanese financials haven’t been working much like banks in the last 20 years. They’re more like badly run fixed income hedge funds. That’s all changing now. Demand for credit is picking up, and as interest rates rise, profitability will also expand.”
Wolter also recommends investing in Taiwan property stocks, especially after the recent sell-off.
“There’s been a correction in property stocks after the introduction of a luxury tax. But as we’ve seen in Singapore and Hong Kong, this doesn’t hold back prices. It will just calm down activity for a little while. Taiwan property is still a great play.”
Wolter’s top pick is Farglory, Taiwan’s largest listed property developer, which has fallen 20% since January.
Disclosure: Emil Wolter does not personally own any of the stocks mentioned.