Taiwan’s stock market would be unlikely to see material impact if the US Federal Reserve scales down its current round of quantitative easing (QE) because the nation’s economic fundamentals remain sound, Bank of America Merrill Lynch said in a research note.
With Taiwan’s export-oriented economy expected to benefit from rising global demand, particularly from the US, the local bourse could be buffered from external shocks if foreign investors start to repatriate their funds due to a possible tapering by the Fed, Merrill Lynch said.
Unlike many emerging economies in Asia, Taiwan boasts ample liquidity, making it better protected against negative external factors, the brokerage said.
Fed Chairman Ben Bernanke spoke in June about the prospects of reducing the bank’s US$85 billion a month bond-buying program later this year, before ending fund injections by the middle of next year if the US economy posts sustainable growth.
Bernanke’s remarks have caused a ripple through global equity markets amid fears of fund outflows, and have boosted government bond yields in the US as many investors fear that ending QE will mean a raise in interest rates.
Merrill Lynch said that although the Fed’s large fund injections create spillover effects for Asia, fund inflows into Taiwan’s market have appeared limited as the local central bank has tried hard to cap the entry of hot money.
Since the Fed launched the first round of QE in early 2009, foreign funds have accounted for 1.2 percent of Taiwan’s GDP, lower than Malaysia’s 7 percent, Thailand’s 2.7 percent and the Philippines’ 2.3 percent, the brokerage said.
Due to the relatively small amount of hot money in its economy, Taiwan is unlikely to feel much of the pinch from fund outflows once the Fed begins to pull down its massive fund injection measures, it said.
Taiwan has large foreign exchange reserves and enjoys a current account surplus, which will help offset the impact of foreign funds expatriation, the brokerage said in the note.
At the end of last month, Taiwan’s foreign exchange reserves rose US$2.51 billion from a month earlier to hit a record high of US$409.12 billion.
In the second quarter, Taiwan posted a current account surplus of US$13.8 billion, up from US$11.09 billion recorded in the first quarter and from US$10.89 billion registered in the same period last year.