Taiwan to attract billions in
capital By Mac William
Bishop
TAIPEI - It's official: As of
end-of-business, May 31, 2005, the little island of
Taiwan, population almost 23 million, will become the
most important place in Asia, according to some business
analysts.
Well, it will be if you use Morgan
Stanley Capital International's (MSCI) regional indexes
as your barometer for judging such things. And as fund
managers controlling over US$3 trillion in capital track
these equity indexes, Taiwanese securities are sure to
attract billions of dollars from institutional
investors.
The weighting will be removed in two
phases, MSCI said in its announcement of the change on
June 19. The first phase will be implemented on November
30 this year, when the company will reduce the Limited
Investability Factor (LIF), a mechanism the company uses
to adjust for what it views as inflated share prices for
its Taiwan Index from its present 55% to 75%. The next
change will be on May 31 next year, when MSCI will
remove the weighting and the Taiwan Index will fully
reflect the listed prices of its composite shares.
The removal of the LIF will also affect two of
MSCI's composite indexes, the MSCI Far East
excluding-Japan Index and the MSCI Emerging Markets
Index. The revision will boost the country's
representation from 17.18% on the Far East Index to
26.85%, and from 12.09 percent on the Emerging markets
Index to 20.20%. Taiwan currently ranks third in terms
of representation on both indexes, behind South Korea
(at 27.28%) and Hong Kong (at 20.05%) on the Far East
ex-Japan Index and behind South Korea (at 19.20%) and
South Africa (at 14.20%) on the Emerging Markets Index.
But as Merrill Lynch explained in a recent
report: "After the complete removal of the LIF, Taiwan
would replace [South] Korea as the country with the
largest weighting in both the MSCI Far East
excluding-Japan Index and in the MSCI Emerging Market
Index." Markets throughout the region will be affected
by the change: On the Far East Index, South Korea's
representation will fall to 24.10%, Hong Kong's to
17.71% and China's will drop from 12.14% to 10.73%. On
the Emerging Markets Index, South Korea will fall to
18.13% and China will be cut from 8.55% to 8.07%.
Unfortunately, investment gains for one country
often mean losses for others. This will likely be the
case as passive index-tracking funds move funds out of
South Korea, Hong Kong and China, among others, and move
funds into Taiwan.
Merrill Lynch predicts that
about $4 billion in such funds will flow into Taiwan,
while South Korea will lose $800 million in investments.
Hong Kong can be expected to lose about $600 million,
while China will lose about $400 million, the company
said.
The financial services provider's
estimates were backed by statements from Vanguard, the
US's second-biggest mutual fund company, which indicate
that passive tracking funds were gaining in popularity,
particularly funds that tracked Asian indexes.
Actively traded funds will have a much greater
impact on the region, and particularly on Taiwan: as
much as $31 billion could flow into Taiwan from such
funds by the time MSCI removes its weighting next year,
Merrill Lynch noted.
The Taiex, Taiwan's
benchmark index, will undoubtedly benefit from increased
visibility and capital inflows. Goldman Sachs Group Inc
predicts that the Taiex will rise approximately 30%
above its current levels (5,802.55 points at the end of
Friday's trading session) in a year's time - far past
the 7,000-point mark, if the company's forecasts are
accurate.
Despite the announcement, the Taiex
started out slow last week, shedding 0.23% on Monday,
June 21, the first day of trading after the
announcement. But traders rallied later in the week, and
the bourse added 4.2% week-on-week at end-of-day Friday.
Most of the new capital attracted by the change
will be directed toward a limited number of companies,
particularly in the financial services and technology
sectors - Taiwan's two most-competitive sectors.
Merrill Lynch's report listed 15 companies it
thought would attract the most investment, and of these
six were in the technology sector and five were in
financial services. The top three projected gainers of
new funds by May 31 were Taiwan Semiconductor
Manufacturing Co (TSMC) at $459 million, United
Microelectronics Corp (UMC) at $219.9 million, and Hon
Hai Precision Industry Co at $158.9 million. Cathay
Financial Holdings Corp came a close fourth, with $158.8
million in projected new funds.
All of these
companies' shares performed well last week, mostly as a
result of MSCI's decision.
TSMC's shares
finished the week up 7.36%, while UMC's climbed 4.98%
and Hon Hai's added 3.23%. Cathay Financial's shares
gained 6.40%.
Although these companies' shares,
as well as others, can be expected to continue adding
value over the next few weeks, it may not be at such
dramatic rates.
After all, MSCI's decision
hardly came as a shock to most analysts and fund
managers. The reason the company decided to lift the
weighting from the Taiwan Index actually occurred over
eight months ago, on October 1, 2003. On that day,
Taiwan scrapped its qualified institutional investor
(QFII) program, a financial regulation which prevented
overseas investors from holding more than $3 billion in
Taiwan's stocks.
Many economists credit this
investment cap in helping Taiwan's markets emerge from
the 1997 Asian financial crisis relatively unscathed, as
it limited the participation of foreign investment firms
and thereby reduced the volatility of Taiwan's shares.
This reduced volatility was evident in the different
reactions of the region's markets in the second half of
1997. During that period, Hong Kong's markets lost about
30% of their value and South Korea's about 50%: Taiwan's
markets, on the other hand, only shed about 10% of their
value.
But regardless of the cushioning effect
the QFII had on Taiwan's securities during the crisis,
the program was also seen as a hindrance to the
modernization of Taiwan's financial system, and an
obstacle to increasing the value of the nation's
markets.
For that reason, scrapping the QFII
program was a key pledge made by President Chen
Shui-bian in 2003 as part of his administration's
efforts to reform the nation's financial regulations,
and thereby win favor with the business community.
Now that MSCI has finally decided to make its
much-anticipated revision, the Taiex should start to
climb.
The performance of a stock market is
often a barometer of a nation's mood. If this is true in
Taiwan's case, the future is beginning to look a little
brighter than it has over the past few months.
Mac William Bishop is a journalist
based in Taipei. Comments or queries may be sent to
mwbtaiwan@hotmail.com.
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