- While we continue to anticipate that economic growth will continue to slow broadly across the globe over the intermediate term, there is likely to be a handful of countries that have led the slowdown and are poised to lead any potential broad-based economic recovery.
- Taiwan is one of those economies and we are now inclined to trade Taiwanese equities with a bullish bias with respect to the intermediate-term TREND duration.
Yesterday, Taiwanese Primer Sean Chen announced a series of measures designed to boost real GDP growth by +100bps over the long-term TAIL, relative to prior expectations. Those measures include:
- Attracting private investments of at least NT$1 trillion ($34B) annually through relaxing restrictions on Chinese investment(s) and easing curbs on domestic companies investing in mainland China;
- Opening industries such as chipmakers and LCD panel makers to increased Chinese investment; and
- Promoting increased tourism and hospitality-related revenues (the government now expects to grow annual visitors from an expected 7 million in 2012 to 10 million in 2016).
The measures, which carry a notable pro-China theme, come in the wake of the recently-signed yuan clearing agreement that should promote the use of the Chinese currency in Taiwanese financial markets – mimicking what we are seeing today in Hong Kong’s Dim Sum and yuan-denominated deposits markets.
While we continue to express long-term concerns with the Chinese yuan and Dim Sum markets (introduced in a 4/16 note titled: “FLAGGING ASYMMETRIC RISK IN THE CHINESE YUAN AND DIM SUM BOND MARKET”), we do think Taiwan’s relatively small economy ($887.3B) and its financial markets could serve to benefit from an influx of Chinese capital over the intermediate term – at least in the sense that the Chinese have established a penchant for acquiring international assets in strategic industries (energy and materials specifically… is tech next?).
Per Chen, a specific action plan is due out by the end of this month; from a fundamental perspective, this GROWTH-positive catalyst times up quite nicely with the Taiwanese economy’s likely move into Quad #1 on our proprietary G/I/P analysis. Our models currently have Taiwanese INFLATION slowing post the 3Q time frame (the AUG CPI reading came in at +3.4% YoY, which is the fastest rate since AUG ’08), though that forecast is certainly in jeopardy pending further action out of the Federal Reserve.
From a POLICY perspective, the OIS market is pricing in -100bps of cuts over the NTM, while the NDF market is pricing in +1.3% of FX strength vs. the USD over that same duration, indicating a mixed/status quo outlook for Taiwanese monetary policy among market participants – a view we’d agree with at the current juncture. If, however, our forecasts prove correct on Taiwanese GROWTH, we could see the interest rate swaps market price in less monetary easing on the margin, and that could prove positive for continued gains in the Taiwanese dollar (up +2.4% YTD vs. the USD).
On the equity market front, Taiwan’s benchmark Taiwan Stock Exchange Weighted Index (TAIEX) closed today down -7% from its MAR 2nd YTD peak. Moreover, the TAIEX has underperformed the regional median gain across Asian equity markets on both a six-month (-4.5% vs. +2.2%) and LTM (-0.5% vs. +7.1%) basis, so we like the potential for Taiwanese stocks to play “catch-up” relative to the region over the intermediate term from mean reversion perspective.
We also like that the Taiwanese government has recently cut its 2012 real GDP growth forecast by -20% to +1.66%, confirming the YTD plunge in consensus 2012 growth expectations (from +4.1% in JAN to +1.8% currently) and creating ample space for upside surprise risk in the reporting of Taiwanese economic data.
Why We Wouldn’t Own Taiwan
Two fundamental factors that are not in support of our bullish bias are 1) exposure to Chinese/global growth slowing and 2) a meaningful lack of economic headroom to apply fiscal stimulus to boost growth over the intermediate term.
To the first point, it should be noted that exports account for roughly 60% Taiwan’s real GDP, leaving the country somewhat exposed to global growth trends – trends we expect to continue deteriorating over the intermediate term. Its largest export market is China (28.1% of total shipments per CIA Factbook) – a country where economic growth has slowed significantly and looks to base at/near current historically-depressed rates over the intermediate term.
To the latter point, Taiwan scores quite poorly on our propriety Stimulus Space Index; in fact, it posts the third-lowest reading of our 17-country sample of Asian and Latin American economies. For more details, including our methodology, refer to the following note: WHO’S GOT SPACE FOR STIMULUS IN ASIA AND LATIN AMERICA? (8/23).
All told, while we continue to anticipate that economic growth will continue to slow broadly across the globe over the intermediate term, there is likely to be a handful of countries that have led the slowdown and are poised to lead any potential broad-based economic recovery. Taiwan is one of those economies and we are now inclined to trade Taiwanese equities with a bullish bias with respect to the intermediate-term TREND duration.