The rise of the West (and Japan)
Policy and economics: Taiwan December export orders grew at 15.27% yoy, or USD36.57bn for a record high. For the whole year, TW export orders were up by 26.14%, a six-year record in terms of yoy growth. We expect the momentum to decelerate to 6.7% yoy in 2011. We revised up TWD/USD forecasts to 28.4 by 2011-end (vs. 29.5 previously) and 27.5 by 2012-end. This can be negative for the exporter/technology sectors (55-60% of TAIEX market cap) in terms of margins and competitiveness, though historically the rising TWD actually provided liquidity to support the equity market. We also expect four rate hikes (with 12.5bps each) over the next 12 months. We expect the government to struggle between asset inflation (through FX intervention) and growth/wage/job deceleration (if TWD goes up too much). This is particularly sensitive going into the 1Q12 Presidential election.
Fund flows and investor views: QFII investors have been a net buyer in Taiwan in December and January (net bought USD5.2bn since 1 December). In terms of sectors, Electronics gets the biggest buy in (net buy USD2.5bn, mostly in semiconductor) and Plastics comes second (net buy USD881m). Local ITC cash level remains within a tight range (11.48% to 11.82%) in December/January. We believe most investors are looking to buy out of liquidity push. With Tech being an underperformer in 2010, and the view that developed market growth will see upside risks in 2011, we believe investors will continue to add positions in Technology in 1H11. We have an OW on Tech and UW on Non-Tech. On Financials, we have a Neutral view.
Eoin Treacy's view A number of larger cap Asian markets such as Korea, Hong Kong and Taiwan have moved to positions of relative strength over the last few months. This is at least in part because ASEAN neighbours are in a corrective phase but also because these markets spent much of last year ranging, and have only recently begun to re-attract significant investor interest.
Taiwan in particular is leader among this group and hit a new recovery high today. While it has become somewhat overextended relative to the 200-day MA, it remains in a consistent short-term uptrend and a sustained move below 8800 would be required to question potential for additional upside
The Taiwan Financial & Insurance Index also completed a relatively lengthy consolidation in December and continues to pull away from the 950 level. A downward dynamic would be required to check potential for further upside.