Sars is anticipated to be a short-term problem for Taiwan but political tensions and issues in its ...
Sars is anticipated to be a short-term problem for Taiwan but political tensions and issues in its technology sector are creating concerns regarding its future economic development.
Mark Mobius, portfolio manager of the Franklin Templeton Emerging Markets fund, believes the most critical factor for Taiwan is the direction of the US economy. Taiwan is very open and, to a great extent, depends on the demands of the US, he says.
Senior emerging markets analyst for First State Investments, David Gait, says during times of a weak US economy, companies cut costs by outsourcing to Asia, which benefits Taiwan. At the same time, weak demand from the US for technology-related products has a negative impact on Taiwan's economy and it is difficult to see which outweighs the other, he adds.
Mobius says the market has come down by more than 60% in US dollar terms from its peak in April 2000, although the current P/E ratio of 18 times seems to be much higher than many other Asian markets.
He says: 'The picture is actually being distorted by the fact the heavyweight semiconductor companies are expected to recover from their losses and to post only small amounts of profit this year. Beneath those companies, we are finding stocks with more attractive valuations. Some of the names in our portfolios are at single-digit P/E ratios.'
While it is not a cheap market, valuations are more attractive than they have been but not quite compelling, says Gait.
Taiwan is suffering the after effects of over-investment in electronics and Gait is still cautious on the sector as competition remains tight. 'The electronics industry needs consolidation,' he says. 'Unfortunately, a lot of the companies are in cash-rich positions because of money made and raised during the tech boom of 1999 and 2000, which is now prolonging the problem.'
The Sars epidemic has had very minimal impact on Taiwan's economy, according to Mobius. As of 2 June, he says, there were 684 cases reported and 81 deaths.
'It might have created some limitations for travel but the impact should be short-term in nature,' Mobius adds. 'The market has also been quite resilient to the Sars impact, simply because investors had seen its impact on Hong Kong and Singapore and were in little doubt the epidemic could be brought under control within a short period of time.'
Gait says it is hard to see what the full impact of the Sars epidemic will be at this point as it is still a problem in the country although he agrees it will be a short-term issue.
Mobius is positive on the long-term outlook for Taiwan. He believes over the past few years, the economy has successfully gone through a major deflationary adjustment, mainly through migrating most of its production capacities over to mainland China.
Gait sees Taiwanese politics as the main threat to the economy as China insists no country can have formal ties with both mainland China and Taiwan.
Mobius says China has made it clear to the international community Taiwan is part of China. Although, economically, Taiwan is being gradually integrated into the mainland, he adds, the island is still politically independent, with having its own government and military forces.
Positive long-term outlook.
Some good valuations.
Short-term impact of Sars.
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