The nation's stocks will rally to make the key share index the region's best performer this year as ties with China improve, earnings recover and overseas investors buy more of the island's equities, JPMorgan Chase & Co said.
The TAIEX, which has dropped 3.5 percent this year to 5,925.88, may rise as high as 10,000 by the end of next year, led by technology and financial stocks such as Taiwan Semiconductor Manufacturing Co (台積電) and Cathay Financial Holding Co (國泰金控), said Adrian Mowat, JPMorgan's Hong Kong-based regional equity strategist.
Mowat's optimism stems from China's moves to soothe cross-strait tensions last month after the government in March passed an "Anti-Secession" Law authorizing an attack against Taiwan should it seek formal independence.
Taiwan equities are "very attractive," Mowat said today in a telephone interview. "Politics have kept people out of the market. Beijing is keen to improve relations with Taiwan."
Mowat, 39, who joined JPMorgan three years ago and has been looking at the financial markets since 1988, said Taiwan is his biggest "overweight" market in Asia outside of Japan, meaning he recommends investors own a higher percentage of shares in Taiwan stocks then indicated by MSCI's benchmarks.
The TAIEX, which fell to a six-month low last month, has since rallied 4.1 percent. The index trades at 14.4 times estimated earnings, cheaper than the 14.7 times for the MSCI Asia Pacific Index.
"We've had terrible news flow about what's been going on with relations with China," and that's been weighing on stocks, Mowat said. "At least they are talking and there's progress."
As political tensions ease, Taiwan's stocks will start to "look so cheap" because of improving earnings, especially at technology companies, and dividend payouts, Mowat said.
The brokerage raised its earnings estimates for technology companies including TSMC, Mowat said.
Acer Inc, Taiwan's No. 3 computer company by value, and Hon Hai Precision Industry Co (鴻海精密), its biggest electronics company by sales, are among JPMorgan's other top picks.
Acer said on April 29 that first-quarter profit rose 16 percent, beating analysts' estimates, as it won market share. Acer's shares have gained 11 percent this year. Hon Hai said last week April sales rose 72 percent from a year earlier.
JPMorgan reiterated its "overweight" weightings on all three technology companies last week.
"We're beginning to upgrade technology stocks and that's very important" because their shares account for the majority of trading in Taiwan, Mowat said.
Shares of the nation's banks are also attractive because of their dividend payouts and improving business prospects.
Taiwan's 14 financial holding companies have an average 3.7 percent dividend yield, higher than the 2.042 percent yield on the 10-year bond and the 2.2 percent yield of the MSCI Asia Pacific Index. Cathay Financial, the nation's biggest financial services company, has a dividend yield of 4.3 percent. The company's payout increased by a third over the past year.
"You're getting paid this huge cash-yield premium to own equities," He said. "We can't find that anywhere else. This is a much better place to put your money."
Taiwan will get an added boost from MSCI's decision to give the nation's equities full representation in its indexes at the end of the month.
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