Investor sentiment on Taiwan and Korea has changed to one of short-term pessimism due to market corr...
Investor sentiment on Taiwan and Korea has changed to one of short-term pessimism due to market corrections in technology stocks and political problems.
Vanessa Doneghan, head of the Asian desk at Threadneedle says: "In the short term the market is going to get weaker. Domestic confidence is fragile and locals have been putting money in banks rather than investment trust companies. Overseas investors like Threadneedle see attractive valuations in the market but local investors are worried about the financial system."
Adrian Mowat, head of the Asian desk at Martin Currie, says the Martin Currie Asia Pacific Fund is a good illustration of changing sentiment.
The fund is very underweight in both Taiwan and Korea. It has allocated 4.7% of assets in Taiwan as opposed to the MSCI Asia Pacific Free excluding Japan index weighting of 13% and 4.4% of assets in Korea compared to the 12.32% benchmark.
Meanwhile, the fund is heavily overweight China, with 15.4% exposure while the index weighting is 6.6%. It has allocated 34.5% in Hong Kong and 15.7% in Singapore compared to their respective benchmark weightings of 18.39% and 8.52%.
Martin Currie believes the US economy will achieve a soft landing and that interest rates will peak this year. Therefore stocks that are sensitive to interest rate levels will start to discount the peaking and the eventual fall of interest rates. Mowat says that Martin Currie wants to be overweight in those types of companies and hence are overweight in property and banks in Hong Kong and Singapore.
Doneghan says that in the short term, the entire Far East region is under a cloud, suffering the effects of the rise in oil prices and the slowdown of the US economy.
She says: "Both Korea and Taiwan have been adversely affected by the negative outlook of technology stocks. D-Ram prices have come under pressure and both Korea and Taiwan are very exposed to these sectors. However, we do expect D-Ram prices to recover into the fourth quarter."
There are also political problems in Taiwan, which have affected investor sentiment. The new administration, the Democratic People's Party, which displaced the long serving Kwomintang government is new to the position and very inexperienced. The enthusiasm of the new administration to expose the corruption the ancient regime was involved in, has been damaging to banks, says Mowat.
In addition, the Taiwan government is running a fiscal deficit and has to run a tighter monetary policy which is bad for the stock market as investors have to be sensitive to interest rate changes.
Mowat says: "The Taiwanese market is very dominated by technology stocks, with around 80% of both foreign and local portfolios composed of them. With the fall in technology stocks since April it has all been working in the wrong direction for the market."
Mowat believes these countries are suffering from too fast a recovery from the crisis of 1998, which took pressure off governments and companies to reform.
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