Although there is short-term optimism about the Taiwanese market, increasing investment by companies...
Although there is short-term optimism about the Taiwanese market, increasing investment by companies into China will serve to hollow out the manufacturing sector in the long term.
Taiwan remains highly dependent on technology and semi-conductor enterprises, although there is believed to be a rising consumption story.
The best performing sector in the Taiwanese economy for the year to 25 November was autos, which returned 130.57% in local currency terms.
This was followed by the rubber sector, which returned just under 83%, and steel, which gained just under 70%. The electronics sector, by far the largest and most important industry in Taiwan, comprising more than 56% of the index, was the worst performer during the year, falling 29.31%.
The importance of the tech and electronics sector in Taiwan is reflected in fund managers' holdings within the country. Stephen Swift, manager of the Close Finsbury Far East fund, says 12% of the £10m portfolio is in Taiwan and is mostly invested in the tech sector.
'We have very little outside tech,' he says. 'Examples of companies we hold are Compal, Novatech and AU Optronics.'
Issues facing the Taiwanese economy include the fact most of the end products in Taiwan are destined for the US. This ties the country closely to the fortunes of the US economy which is slowing down.
Another geopolitical issue for Taiwan is China, says Swift. 'On the one hand, the Taiwanese are investing in China and on the other they are still at war with them,' he says. 'Increasing investment by the Taiwanese in China may result in a 'hollowing out' of Taiwan,' he says.
The Taiwanese banking model has followed the Japanese example, he says, and now there are systemic problems such as the banks not being run for the shareholders' benefit and a legacy of bad loans. The trouble is, he continues, there is a lack of political will as the government is fragile.
This compares to the nearby economy of Korea, which is also technology dominated but has made some attempts at banking reform, Swift says.
Despite these negatives, Swift says he has upped the fund's Taiwanese exposure from 6% to 12% in the last six weeks. 'I felt there would be a year end rally that would benefit the country.
This will come on the back of increased consumer spending in the US, which will feed through to the Taiwanese component manufacturers,' he says. Richard Cardiff, Far East specialist at JPMorgan Fleming, adds that the Christmas season will see increased demand for digital cameras over film cameras and DVDs over videos all of which will benefit Taiwanese component manufacturers.
He also shares Swift's assessment on China and adds that China is both a threat and an opportunity to Taiwan. Outsourcing to China will continue apace, he says, and the development of the Chinese economy will be beneficial to Taiwan as it is closely linked, historically and economically.
Year end rally expected.
Christmas period approaching.
Opportunity in China.
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