Taiwan is Asia's hottest investment as China, tech concerns fade

[HONG KONG] Global investors can't get enough of Taiwan.

Overseas funds poured US$5.4 billion into the island's equities last month, taking inflows for the year to US$11.6 billion and making Taiwan the most popular destination for investors among nine Asian markets tracked by Bloomberg. That's helped send both the benchmark stock gauge and the currency to one-year highs.

Fueling gains are bets that the imminent release of Apple Inc's iPhone 7 will boost profits at Taiwan suppliers and relief that the new political era under President Tsai Ing-wen hasn't led to a conspicuous deterioration in ties with China.

While a stronger currency may crimp overseas earnings for exporters, Prudential Financial Inc's local unit sees room for further gains as Asia's second-highest dividend yield and below- average valuations lure investors.

"Taiwan is especially strong because everyone knows the new iPhone will be launched in September or October, and production begins in the second quarter," said Hsienwen Yeh, head of greater China investment at Prudential Financial Securities Investment Trust Enterprise in Taipei.

The increased investor enthusiasm toward the island's stocks is a reversal from May, when global funds rushed for the exit amid concern slower smartphone sales growth would hit the local supply chain and the new president would strain ties with China.

Ms Tsai has avoided provoking China directly, saying in her inauguration speech that Taiwan will maintain peace and dialogue.

Since Ms Tsai assumed the presidency on May 20, the Taiex index has rallied 15 per cent on a dollar basis, the fifth-biggest gain among 94 global benchmark indexes tracked by Bloomberg.

The Taiwan dollar has strengthened 3.3 per cent, the most in Asia after the currencies of Japan and South Korea.

Technology companies have driven the advance. Taiwan Semiconductor Manufacturing Co, the island's largest listed company and a major Apple supplier, climbed to a record this week after forecasting third-quarter sales that beat estimates as the new iPhone's release neared.

Apple added to positive sentiment after reporting sales that fell less than projected in the April-June period.

"I will increase allocation to some names related to iPhone 7 production" after reducing exposure in the first half, said Stevie Chou, Taipei-based head of equities at Manulife Asset Management (Taiwan).

"The third quarter is a hot season for information technology products." Mr Chou sounded a word of caution, saying the index's rally may be limited by the island's lacklustre economy.

Gross domestic product expanded 0.69 per cent on a yearly basis from April through June, after three straight quarters of contraction. A stronger Taiwan dollar is also a threat to exports, which have shrunk for 17 months in a row.

Global investors have overlooked these challenges of late as they hunt for high yields amid receding returns around the world and decreasing odds of a Federal Reserve interest-rate increase this year.

The island's 4.03 per cent dividend yield is Asia's highest after Australia, and its 16.2 price-to-earnings ratio is still less than its five-year average of 17.4.

"Taiwan's dividend yield is better than most emerging markets," said Peter Tzeng, senior vice president at IBTS Investment Consulting Co in Taipei.

"While there's some uncertainty over global economic growth, the earnings of Taiwan's listed companies haven't been too bad. So when there's a lot of money around, funds come to Taiwan."

BLOOMBERG