SGX: Taiwan Stocks Emerge as Winners Amid Turbulence

OREANDA-NEWS. In line with the August sell-off in equities, the MSCI Taiwan Index ^SM plunged to its lowest level in almost three years, sinking below the 200-day moving average. As the Chinese government’s swift intervention restored a semblance of calm, Taiwanese equities rebounded from their recent lows.

To ensure stability, Taiwanese authorities gave the green light for a US\\$15.3 billion fund to invest in its stock market. This move, together with the return of stability in the Chinese market, spurred a rebound in Taiwan equities.

The MSCI Taiwan Index^SM has gained 2.58% in US dollar terms so far this month (as of 18 September), emerging as Asia’s best performer after Korea.

Average daily volume for Singapore Exchange’s (SGX) MSCI Taiwan Index^SM Futures jumped 15% month-on-month to 78,275 contracts, or US\\$2.3 billion in notional value, in August as market volatility soared and investors used the futures to hedge risk exposure.

Settled in US dollars, the SGX MSCI Taiwan Index Futures is a quanto product - a type of derivative in which the underlying is denominated in one currency, but the instrument is settled in another currency at some fixed rate. In other words, the quanto feature removes FX uncertainties in the settlement process by settling all profits and losses in US dollars. 

The export-dependent Taiwan economy has decelerated since global growth stalled. As exports to China shrank in the second quarter due to cooling electronics demand, Taiwan's economy slowed more sharply than expected to a three-year low.

Gross domestic product expanded 0.64% year-on-year, below the 2.67% consensus estimate, and at the weakest rate since the second quarter of 2012, according to data from the Directorate General of Budget, Accounting and Statistics.

The slowdown in Taiwan, an important hub in the global supply-chain for tech giants such as Apple and Hewlett-Packard, reflects the broader downturn in regional economies with close trade ties to China.

On a brighter note, Apple recently unveiled a line-up of new products, including updated iPhones, a revamped TV set-top box for playing games and watching videos, and a bigger iPad designed for business customers. While some watchers have deemed Apple’s latest offerings disappointing, it is too early to predict demand for these products.

Apple is one of, if not the largest customer of Taiwan’s electronics component makers. Higher iPhone and iPad sales will benefit contract chip maker Taiwan Semiconductor Manufacturing Co and electronics manufacturing services provider Hon Hai Precision Industry Co. Both stocks account for more than 30% weighting in the MSCI Taiwan Index.

The recent strength of the greenback, which has appreciated against most emerging-market currencies this year, should also boost the earnings of Taiwan-listed companies. About 75% of their revenues is denominated in US dollars, according to Chung Hsu, a strategist at Credit Suisse in Taipei.

Interestingly, Apple, has a daily correlation of over 67% with the MSCI Taiwan Index. At the same time, the MSCI Taiwan Index has demonstrated robust correlation with the Nasdaq 100 and Taiwan indices.

As of 31 August, the MSCI Taiwan Index accounted for 15.0% of the MSCI Asia ex-Japan Index and 12.6% of MSCI Emerging Markets index respectively.

Going forward, Taiwan looks set to elect the next president on 16 January 2016. With a pro-independence presidential candidate leading in the polls, tensions between Beijing and Taipei could resurface as Taiwan’s opposition party plays the China card.

Daily Correlation Matrix (31 August 2014-31 August 2015)