The New Taiwan dollar could strengthen further against the US dollar this quarter on inflows of “hot money,” while the local bourse might soon enter a period of technical corrections on concern over tightening measures at home and in China, Taishin Securities Investment Advisory Co (台新證券投顧) said yesterday.
The upward trajectory of the New Taiwan dollar, which closed at a 13-year high of NT$29.45 against the greenback in Taipei yesterday, has yet to peak, said Lii Sheng-yann (李勝彥), a senior consultant at Taishin Securities Investment and a former central bank board member.
“We may see it inching near the NT$28 level in the near term,” Lii said. “But it is likely to hit resistance there.”
Lii, also former chairman of the Export-Import Bank of ROC (中國輸出入銀行), linked the -appreciation mainly to ongoing flows of global capital into emerging Asian economies.
Taishin Securities Investment chairman Andy Wu (吳火生) said that regional central banks are taking steps to stabilize their national currencies, which may sideline equities players.
“Tightening measures tend to trigger short-term stock corrections although their long-term showings hinge on economic fundamentals,” Wu said.
He suggested investors cut back holdings in local shares and increase stakes in bonds this quarter.
Wu expects the TAIEX to take a break after the Lunar New Year holiday next month due to an increase in interest rates in China designed to ease inflationary pressure, thereby weakening general sentiment.
President of the firm’s research department, Chuang Ming-shu (莊明書), said he expected the main index to climb to 10,500 points toward the end of the year with non-tech stocks to lead the rallies.
The sluggish economic recovery in the US and Europe will continue to dampen demand for consumer electronics except smartphones and tablet computers, Chuang said, adding that improving ties with China could further benefit airline stocks despite rising oil costs.
Deutsche Bank, however, was taking a different view.
The brokerage said it expected the rising NT dollar to help bring in ample liquidity to support the local bourse and it was favoring tech shares instead of non-tech ones.
In a research report published on Friday, Deutsche Bank said it forecast the local currency would appreciate to NT$28.4 against the US dollar within 12 months and to NT$27.5 by the end of next year.
Deutsche Bank analyst Julian Wang (王俊朗) said in the report that while the strengthening NT dollar could erode electronics exporters’ margins, “the consequent liquidity push could outweigh the margin downside,” he wrote.
Citing historical experience, Deutsche Bank said the NT dollar had appreciated by 9 percent against the US dollar during the fourth quarter of 2004 and first quarter of 2005, resulting in a decline of between 4 percent and 5 percentage points in the aggregate gross margin and operating margin of listed electronics companies. Despite that, the TAIEX still rose 5.9 percent and the TAIEX Electronics Index increased 8.2 percent over the same period.
“In other words, we can see price-to-earnings multiple expansion in the near-term while corporate profitability contracts,” Wang said.
Deutsche Bank said it expected the local bourse to benefit from this liquidity-driven momentum during the first half of the year, adding that it is over-weighting tech shares.
Although the local currency has persistently risen to fresh 13-year highs against the greenback in recent weeks on the back of steady foreign inflows, an important question remains how much the currency has yet to appreciate — could it rise to the NT$25 to NT$26 level seen from 1988 to 1995?
“The question is: Could it happen again? Without making any foreign exchange projections, we point out that the economic context is very different now versus then,” Wang said in the report.
He said many Taiwanese firms relocated abroad about two decades ago during the nation’s economic transformation. At that time, a strengthening NT dollar was positive for companies making outbound investment.
Wang said he did not expect the central bank to allow the NT dollar to move toward the NT$25 to NT$26 level now that over 50 percent of Taiwan’s export orders were taken in local firms’ overseas plants, as such a scenario would only hurt Taiwan’s exporters and lead to asset inflation. It would also have a negative impact on Taiwan’s domestic investment environment, creating fewer jobs and lowering wage growth.
“We can see the central bank’s dilemma wherein it would have to make a trade-off between growth and inflation ahead of the 2012 presidential election,” Wang wrote.
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