First State and Britannic Asset Management remain wary on Taiwanese equities in part because of the ...
First State and Britannic Asset Management remain wary on Taiwanese equities in part because of the country's relationship to mainland China.
Both groups feel the future is uncertain for Taiwanese firms trying to buy into emerging China. Lack of prospective restructuring of Taiwan's state-banks-dominated finance sector and the global IT decline are other factors being considered.
The stock exchange, the TWSE, has come down to about 5,000, following a 2002 high of 6,500. Year-on-year GDP growth in Taiwan is 4.8%, while consumer prices rose 0.01% in January from December, according to Bloomberg.
Charles Heenan, Asia Pacific investment manager for First State, says: 'We have not been positive on Taiwan; we hold very little there. On technology, there is very little differentiation between companies and the barriers to entry are not especially high, so competition has been increasing exponentially.
'There is no real brand existing in Taiwan, so its technology is much more commoditised. Capital has been going in and not leaving, so capacity has been expanding. This has made it hard for companies to get returns on the capital they are spending.'
Heenan also feels the government is not being active enough in tackling the banking sector. He sees a need for fundamental restructuring because of distortions caused by the dominance of state banks.
Since 1990 Taiwanese businessmen have invested up to $100bn in China and last year China replaced the US as Taiwan's biggest export market, with purchases of $41bn.
Helen Fallow, Britannic Investment manager for the Far East ex Japan, says: 'Taiwan's problem is a hollowing out of the manufacturing sector to China. The question is, how is it going to replace it?
'Taiwan also has some structural problems to resolve, with the finance sector definitely one of them. Our activity here is more stock-specific at the moment, rather than sector-led.'
Britannic has been underweight Taiwan as a whole but neutral on technology. IT holdings include networking firm Ambit Microsystems and mobile handsets and laptops manufacturer Compal Electronics.
China building up its own semiconductor sector is not an immediate threat but a longer-term issue, adds Fallow. January saw preliminary Taipei approval for an $898m Taiwanese semiconductor plant in Shanghai.
Taiwan is coming under increasing pressure to allow direct flights to China to begin within the next year, as more Taiwanese begin to tie future prosperity to tapping into the world's fastest growing major economy.
With prospects for direct links to China improving Fallow is looking harder at investing more in Taiwanese airlines.
Heenan says: 'There is still a viable model in which firms will reside in Taiwan but have their manufacturing base in China. It would have to mean capital flowing through Taiwan and its legal system in the longer term.'
In terms of high-end technology staying and consolidating in Taiwan, rather than moving to China, Heenan has doubts. He says: 'The Taiwanese have not quite made the step up to where the real creativity is, with the real front-end design such as is done in more developed countries.'
Taiwan remains entrepot for China.
Market looks cheaper than in 2002.
Stock specific opportunities in Taiwan.
Manufacturing being lost to China.
Financial sector needs to restructure.
Fallout from tech crash remains.
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