Taiwanese stocks have been on a roll: the benchmark TAIEX index has gained 52% from its October low, and 38% this year alone.
Chalk it up to “cross-straits euphoria”, says Lex in the FT. A 60-year freeze in relations between Taiwan and the mainland is beginning to thaw. Taiwan is now allowing investment by Chinese companies, and China plans to allow institutional investors to buy Taiwanese stocks later this year.
Deepening ties between Taiwan and the mainland could give Taiwan’s economy the kind of boost that Hong Kong received after the 1984 deal between Britain and China, says Christopher Wood of CLSA. “The story is just beginning.”
Taiwanese investors have “repatriated funds in droves”, says John Foley on Breakingviews, while analysts have raised their TAIEX forecasts. Kevin Lin of Taishin Securities Investment sees the index, which is now around 6,200, hitting 15,000 by 2011.
For now, however, the rally has gone far enough. Credit Suisse noted last week that the market was trading at a 60% premium to the rest of the region; the trailing p/e is 60.
Yet a recent trend of upgrades to earnings forecasts is weakening and the macroeconomic data remains discouraging. Unemployment has hit a record and the economy shrank by more than 10% year-on-year in the first quarter. The crucial export sector is still suffering: foreign shipments were down by an annual 31% in May, only a marginal improvement on April’s 34% drop.
No wonder, then, that the index has been heading downwards for the past few days; as Howard Wang of JPMorgan puts it, “there are enormous profits to take”.