The improved relationship across the Taiwan Strait since President Ma Ying-jeou (馬英九) took office last May has drawn capital inflows into the local bourse that market watchers said symbolize the return of retail investors at the expense of foreign investors.
“Flush with their inward cash remittances, retail investors have returned to the market aggressively, explaining why it has rallied so strongly this year with little foreign institutional participation,” Peter Kurz, head of Taiwan equity research at Citigroup Global Markets Inc, said in a report on Friday.
Based on Citigroup’s tallies, retail investors accounted for 94 percent of local stock market turnover 10 years ago. The figure dropped to 65 percent at the end of last year and has climbed back to 80 percent.
The benchmark TAIEX has risen 40.8 percent this year but it was still 17.3 percent lower than a year earlier because of the global financial crisis, Taiwan Stock Exchange data showed.
Even so, the worldwide credit crunch has tipped major economies into recession and undercut equity returns in their markets, which Kurz said would induce more capital repatriation from Taiwanese citizens to supplement the weakened foreign institutional investors balking at rising valuations of Taiwanese shares.
“Capital repatriation may be sufficient to reverse the 10 years of Taiwan’s stock market underperformance,” he said in the report.
Citigroup estimated that Taiwanese still own about US$500 billion in offshore capital holdings.
Historically, retail investors have a tendency to bid up the so-called small-capitalization companies with high volatility — even though retail investors could not generate enough daily turnover to absorb shares dumped by institutional investors en masse.
But Citigroup has found an interesting tendency in the past few months that could imply a likely market trend: investors’ interest in small capitalization stocks are back, despite concerns that weak corporate earnings could keep further gains in check.
“The small caps beat out the big caps in 16 out of 22 sectors” based on Citigroup’s own market categorization, Kurz said in the report.
That includes small-cap stocks in the semiconductor, computer hardware, financials, materials and domestic demand sectors.
Using the small-cap foundry stocks as an example, they have increased 78 percent since the beginning of the year, outperforming a 20 percent rise on their big-cap counterparts over the same period, the report showed. Small caps in the flat-panel display sector have also witnessed a 102 percent rise in share prices so far this year, compared with an increase of 36 percent in their big rivals at the same time, the report said.
But in the telecommunications, notebook computers and transportation sectors, they are still dominated by the big caps, while MediaTek Inc (聯發科), Hon Hai Precision Industry Co (鴻海精密) and Epistar Corp (晶元光電) remain the most favored in their prospective sectors, the report said.