A "golden decade" lies ahead for Taiwan equities, according to CLSA Asia-Pacific Markets in a report published a day after the island's parliament approved an historic trade agreement with the mainland.
The bellwether Taiex index, at 7,940 after lunch on Thursday, is set to pass 10,000 during the oncoming decade, according to CLSA, Bloomberg reported on Thursday. Other, purely technical chart analysis looks for it to at least double during the coming decade, with a possible short- to medium-term decline of up to 10-12% presenting a good (very) long-term buying opportunity.
Yet the present level is still below where the index stood in early 2008, when the prospect of Kuomintang party candidate Ma Ying-jeou becoming president led it to rise from 8,161 to 8,524 in the week before the March election and continue up to 9,295 in mid-May on the day before his inauguration. The index then declined to 4,090 towards the end of the year as the global financial crisis took hold.
The Taiex's growth spurt was predicated on the expectation that Ma would take steps to increase trade with the Chinese mainland, and these hopes have not been disappointed. Taiwan's exports to China in July were 38.3% above their level a year earlier. Overseas shipments increased earnings at the flagship Taiwan Semiconductor Manufacturer Co, the world’s manufacturer of custom chips; other electronics sectors such as liquid-crystal displays also chalked up advances.
The prospect of a slowdown in China as well as Japan and the US leads some observers to believe that growth may be weaker in the near future. Nevertheless, major economic analysis houses have been increasing their forecasts of Taiwan's domestic growth for the present year, with the median figure now having risen to a little under 7%, although this is marked down a bit by some for 2011.
There is, however, a rather wide variation in the estimates as the Taiwan Institute of Economic Research has lately published a 5.9% figure, according to the China Post, while the Economist Intelligence Unit arrived at 8.5% earlier this year before trimming it due to caution of the possibility of a global "double-dip" affecting Taiwan's exports.
Taiwan and China in June signed an Economic Cooperation Framework Agreement (ECFA), which is regarded as the forerunner to a free-trade agreement. Taiwan was excluded from the Asian Free Trade Agreement with China that took effect at the start of this year.
The ECFA could end up helping the economic performance of Taiwanese industry without the benefit necessarily redounding to the island itself or its people, if all that happens is that Taiwanese companies relocate to the mainland. A poll of 3,000 local manufacturers by Taiwanese authorities revealed that those focusing on domestic demand (goods such as clothing and food) were afraid that the ECFA would hurt them, while most others (including banking) expected positive benefit from new opportunities on the mainland.
Coupled with the possibility of Chinese investment in Taiwanese companies, the ECFA could in the medium to long term create political problems for the ruling Kuomintang. Indeed, the leader of the opposition Democratic Progressive Party (DPP), Tsai Ing-wen, criticized the ECFA during the legislative debate by pointing out that it could lead to "an uneven redistribution of wealth" and "widen[ing of] the poverty gap" as the geographic concentration of industrial production for export would intensify. Tsai has promised a series of ECFA policy reviews if the DPP is returned to power in two years' time and has hinted even at the possibility of a referendum.
As for the Taiex, its 7,162 level, which I indicated as a resistance in April last year (see Taiwan's ambiguous recovery, April 2, 2009), twice halted the index's progress until the level was finally broken through in the first half of September 2009. It then became the lower bound of the trading range the index has occupied since then.
It was anticipated that signing the ECFA with the mainland would help to lift political obstacles to Taiwan negotiating free-trade agreements with third countries, Singapore and Japan topping the list of prospective partners.
These expectations appear to have been on target, as Chinese officials indicated this month that they would not stand in the way of a bilateral Taiwan-Singapore agreement. The Taiwan and Singapore stock exchanges have led the recent recovery in Asian equities, and the Taiex and Straits Times Index have tracked each other impressively closely for over five years.