Taiwan rediscovers its roar
Published: 29 April 2010
Economy set to regain former glories
Welcome to Taiwan - an Asian tiger-economy that has rediscovered its roar. Its GDP is growing strongly, exports and industrial output are booming, domestic consumption is on the rise, unemployment rates are falling and relations with China are improving all the time.
Even by Asian standards, Taiwan's recovery from its deepest recession on record has been remarkable.
"We believe 2010 is the year that Taiwan will regain some of its former glory," said HSBC equity analyst Jacqueline Tse, who expects the domestic stock market, the TAIEX, to reach 10,000 by the end of the year, up more than 30 per cent from February levels.
She added, "Taiwan is our top pick in Asia. Everything is turning around very quickly."
It is worth noting here that analysts who cover Taiwan are generally a cautious bunch, and for good reason. Many were very upbeat, bullish about the all-powerful technology sector a decade ago and learnt their lesson when the bubble burst.
Ms Tse's confidence is based on a combination of economic fundamentals, consumer confidence and the competitive advantage that Taiwan has over everyone else - China.
"It really comes down to the fact that the cross-Strait economic relationship is improving so rapidly and there's a lot more to come," she said.
"I think perhaps the significance of those is being underestimated in some parts of the world. Investors in Asia realise that it is a very big deal."
President Ma Ying-jeou is negotiating a trade accord with China - the Economic Cooperation Framework Agreement, or (ECFA) - that would cut import duties on both sides of the Taiwan Strait. Taiwan's exports to China, its biggest trading partner, soared 187.8 per cent in January from a year earlier, after a 96.7 per cent gain in December.
Under the terms of a bilateral Financial Memorandum of Understanding (FMOU), Taiwan has also approved plans to allow banks, brokerages and insurance companies in China and Taiwan to invest in each other, paving the way for a broader economic engagement as cross-Strait relations improve.
The key factor for the improvement in consumer sentiment is that job prospects are much better.
"All the economic indicators are improving. It's not just exports, which are of course very important in Taiwan, domestic consumption is growing too," Ms Tse commented.
The key factor for the improved consumer sentiment is that job prospects are much better. People had compulsory vacations in 2009 but now all the talk is about job opportunities and better bonuses.
Consumer sentiment very much represents a grassroots opinion, so it is a very good indicator of what people are thinking. It has an 84 per cent correlation with the performance of the Taiwan stock market.
Ms Tse continued, "This also shows how important the retail investor is in Taiwan - it represents 50 per cent of the market turnover. It also explains why the Taiwan market can be very hard to predict. It can be very volatile as retail investors make a lot of short-term trades."
The sustained rise in new orders, both domestically as well as from abroad, suggested that the island's economy will register another bumper quarter of economic growth.
Foreign institutional investors (FIIs) are also returning, suggesting that Taiwan's growth story is very much on the radar screen of fund managers not just in Asia but in the US and Europe too.
A quick look at the leading economic indicators confirms the bullish picture. Taiwan's industrial output surged 70 per cent in January from a year earlier, as export orders rose at a record pace.
The gross domestic product (GDP) increased 9.22 per cent in the three months through December, snapping a run of five quarters of declines and exceeding estimates in a Bloomberg news survey of nine economists, where the median forecast was for a gain of 7.1 per cent.
Another important economic indicator, the HSBC Purchasing Managers' Index (PMI), suggests the strong growth is sustainable. The PMI reading in January was 61.7, an increase from December's 58.7, indicating substantial growth in Taiwan's manufacturing sector.
Frederic Neumann, Managing Director and Co-Head of Asian Economic Research, HSBC Global Research, said: "Virtually all activity indicators pointed to an acceleration of growth since December. The sustained rise in new orders, both domestically as well as from abroad, suggested that the island's economy will register another bumper quarter of economic growth.
"Encouragingly, firms continued to hire staff at a marked pace, as indicated by the employment subcomponent of the PMI as well as the rapidly falling unemployment rate."
This bullish outlook is also good news for HSBC's banking operations in Taiwan, where it has had a presence since 1885. A full-service branch was established in Taipei in 1984 and today HSBC provides a full range of insurance, personal, commercial, corporate, private banking and investment services.
In 2008, HSBC successfully acquired a local bank to further broaden its island-wide networks and has announced to set up a subsidiary in May 2010, showing its strong commitment to Taiwan, and its ambition to deepen its relationship with Taiwanese clients to further leverage more business to clients' Greater China footprints.
As explained by John Li, HSBC Taiwan Head of Global Banking and Markets, Taiwan plays an important role in HSBC's Greater China platform and is one of HSBC's key growth markets in Asia.
Credit spreads in Taiwan are among the lowest in Asia, so the competition is tough.
"The competition we face is from both foreign and local banks," he said. "Credit spreads in Taiwan are among the lowest in Asia, so the competition is tough, especially now that the product offerings from local banks have improved.
"To succeed, HSBC has to differentiate its services. We are the most successful Greater China bank.
"Many customers have their headquarters in Taiwan, manufacture their products in China and export to Asia, the US and Europe. That's why our Greater China platform is so important. Our strength is being able to offer cross-border services. For example, to accommodate Taiwan companies operating in Greater China, we extend the Taiwan desk service teams to Hong Kong, Shanghai and Vietnam.
"We are ready for the new epoch."
Frederic Neumann
Frederic Neumann, PhD, is Managing Director and Co-Head of Asian Economic Research, based in Hong Kong.
Before joining HSBC, Mr Neumann taught graduate-level courses on Asian sovereign risk analysis, international financial markets, international monetary policy, and South-East Asian political culture at the Wharton Business School of the University of Pennsylvania and the Graduate School of Pacific Studies and International Relations at UC San Diego.
He also served as a consultant on Asian economic and political affairs to the World Bank and various government agencies. He is also a former research associate of the Peterson Institute for International Economics in Washington, DC. A former Fulbright scholar, Mr Neumann holds a PhD in International Economics and Asian Studies.
Jacqueline Tse
Jacqueline Tse joined HSBC in February 2008 as an Equity Strategist in Asia-Pacific. Previously, she worked at a US investment bank to manage its FX and liquidity risks in various Asian markets and also on the Economics team to oversee the Hong Kong market.
Before joining the banking sector, Ms Tse was the Senior Financial Analyst at Hewlett-Packard in Silicon Valley. She holds an MSc in Operations Research, focusing on Financial Engineering from Columbia University and a BA in Economics from the University of California, Berkeley.
To read full research reports, go to the Global Research website and log on using your e-mail address and password. You will find reports using the filter by author.
If you are a first-time user, please contact your HSBC relationship manager to arrange access to the site.
John Li
John Li joined HSBC in September 2005 and he is the Head of Global Banking and Markets, Taiwan.
He has more than 15 years of experience in derivative instruments, DCM and ECM transactions and has been leading HSBC to gain significant market share in the Taiwan derivative instruments market.
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