Mon, May 15, 2017 - Page 6 News List

Editorial: No celebration as stocks rally

As the TAIEX stock index on Thursday last week closed above the 10,000-point benchmark for the first time in 17 years, the only people to rejoice about Taiwan’s stock market boom this year have been local and foreign institutional investors and those hunting large-cap stocks.

The total value of Taiwanese equities has grown strongly in recent months, but buying continues to focus on select electronics stocks: In spite of the TAIEX’s 733.32-point gain since the beginning of the year, declining stocks still outnumber advancing ones on the Taiwan Stock Exchange this year, which means that it is the large-cap stocks that have led the rally on the back of ample liquidity among institutional investors, while the small and mid-cap stocks favored by retail investors have lagged behind.

So far this year, the TAIEX, which reflects the main stock exchange, has expanded by 8.08 percent, but the TPEx Index, which is the benchmark of the nation’s over-the-counter bourse and features mainly small and mid-cap stocks, has only risen 4.9 percent over the period.

It is not to say that if large-cap stocks are outperforming, investors had better seek safe haven in small and mid-caps to hedge risks, but the market is not likely to experience a sustained rally without some sort of participation from the small and mid-caps.

If the trend of large-cap investment continues, it would naturally raise concern about small and medium-sized companies’ ability to raise funds in the local stock market. Moreover, if this trend is to persist much longer, it would be a sign of a worrying trend in the market.

It would mean retail investors are not interested in getting in at the ground floor of trading anymore, even though in theory, small or mid-caps can grow rapidly and are cheaper than large-caps. The question is why the overall environment has resulted in such an awkard situation for retail investors.

Evidence of a sharp drop in retail investor activity can be found in the swift decline in market turnover. So far this year, the daily average turnover on the Taiwan Stock Exchange is NT$89.73 billion (US$2.97 billion), better than the NT$77.52 billion over the whole of last year, but less than the NT$92.23 billion recorded in 2015.

In the 1990s, when the Taiwanese stock market had its heyday, it was normal to see an average daily turnover above NT$200 billion.

Deepening ties between important Taiwanese manufacturers and Apple Inc are another concern, as most gains in the TAIEX over the past 12 months have been generated by the US firm’s key suppliers, such as contract chipmaker Taiwan Semiconductor Manufacturing Co, smartphone camera lens supplier Largan Precision Co and Hon Hai Precision Industrial Co, a major iPhone assembler.

The challenge for many companies in Apple’s supply chain is that they may have secured big orders, but they face a perennial margin pressure in the face of Apple’s demand for lower prices. Apple might also change its supplier mix due to new product design, development of new technology or simply for the sake diversifying its supplier base.

Of course, it is hard for local manufacturers not to “bite the Apple”: Some previously obscure companies saw their fortunes expand overnight when they partnered with the US technology giant. However, losers in this transaction can be found elsewhere.

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