During the last six months in Taiwan, the economy and the market have been battered by what commenta...
During the last six months in Taiwan, the economy and the market have been battered by what commentators described as a 'perfect storm'. Falling global demand for IT products has seriously undermined the island's all-important electronic industries. Domestically, the power transition from the long established KMT to the Democratic Progressive Party was far from smooth.
The conflicts reached boiling point in the fourth quarter last year when the KMT threatened to impeach the president. These events have caused the stock market to fall by as much as 40% since September, which in turn has triggered speculation that a banking crisis is inevitable.
Given the low expectations, I came back from my last visit to Taiwan pleasantly surprised. Although the business environment is still tough, corporates are showing signs of optimism. There is a hope that the government is finally acting to pull the economy out of the doldrums.
The expected passage of the financial restructuring bill will open avenues for major consolidations in the financial sector. In addition, the introduction of a mini direct link with the mainland has paved the way for legalisation of direct investment in China. Almost every company I have seen has already established some form of business strategy to take advantage of China's cheap production costs and huge market potential.
Even in the very depressed electronic sector, there is a silver lining. The success of the Taiwanese electronic industry is built on its efficiency and cost competitiveness. In an environment where demand is soft and visibility poor, quick turnaround time and competitive price are paramount and Taiwanese companies have been able to gain market share under such difficult circumstances. I believe the Taiwan electronic industry will emerge stronger than ever after the cycle.
While my impressions of Taiwan were better than expected, the same cannot be said of Hong Kong. As a regional financial centre, the local economy is heavily dependent on its stock market and corporate finance activities. The bursting of the technology bubble has seriously undermined the profitability of the financial sector.
I expect to see a sharp decline in GDP figures. However, the slowing economy is a direct consequence of a weaker stock market and should not be used a predicative tool for future stock market performance.
The corporates I met mostly painted a gloomy short-term outlook. This is hardly surprising given the weakness in the external and domestic environment. The only exception is for companies with major activities in China that continue to see healthy demand growth. China, with its large domestic market and weak links with the global economy, appears to be one of the few bright spots in the world of slowing demand.
Edward Chan is a senior fund manager, Far East Equities, at Royal London Asset Management
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