Several publicly listed companies have reported reductions in sales and declining profit margins, as the New Taiwan dollar soared 9.88 percent against the greenback in the second quarter, central bank data showed. The local currency’s sharp rise has sparked concerns that foreign-exchange losses would continue and harm export competitiveness. Many investors are considering taking a more conservative approach or are watching from the sidelines for the moment.
Investors’ concerns are understandable, as the belief that the appreciation of the NT dollar leads to declining export competitiveness, reduced profits and falling equities seems reasonable on the surface. However, that outlook is too simple, and history and market trends have shown that the local currency’s appreciation does not necessarily negatively affect everyone.
A study by analysts at Yuanta Securities Investment Consulting Co of three complete cycles of NT dollar appreciation — from 2008 (first quarter) to 2011 (second quarter), 2014 (third quarter) to 2018 (first quarter) and from 2018 (second quarter) to 2021 (second quarter) — revealed no evident relationship between the local currency’s appreciation and a decline in listed companies’ profitability. The study even showed a slight negative correlation, suggesting that the NT dollar’s rise often reflects improvements in economic conditions and corporate fundamentals.
The study concluded that most Taiwanese companies, especially large exporters and major industry players, can pass on price increases from currency appreciation, because they have higher technological barriers, strong market positions and pricing power, as well as better cost controls and risk hedging mechanisms. The study also found that the exchange rate is just one of many factors affecting a company’s profitability, as global demand and market dominance weigh more on corporate earnings.
To be clear, the NT dollar’s appreciation does cause foreign-exchange losses in the short term, and most firms providing original equipment manufacturing or original design manufacturing services are especially sensitive to foreign-exchange rate changes, as they are unable to pass losses onto customers. What matters more for investors is the companies’ long-term cash flows, their bargaining power in the market and the outlook for the industry they are in, the study concluded.
A decade ago, Taiwan’s stock market was dominated by traditional industries and small exporters that were highly sensitive to foreign-exchange rate fluctuations. Today, blue-chip stocks in the market are technology heavyweights, such as Taiwan Semiconductor Manufacturing Co, MediaTek Inc and Hon Hai Precision Industry Co, which have global leading technology and production capacity, more hedging tools and long-term contracts with customers, rather than short-term orders pressured by price competition.
Even if the NT dollar’s appreciation has a short-term effect on companies’ profit margins, many of their business fundamentals remain solid and they might even have the opportunity to expand their market share amid current tech trends and global supply chain restructuring. Broadly speaking, Taiwan is in a strategic position for global funds looking for returns and growth opportunities, as it is home to high-value-added technology clusters such as semiconductors, and is known for high cash dividends and good corporate governance.
In addition, the NT dollar’s appreciation is also a signal of capital inflows, as it reflects the market’s confidence in a country. When global funds are optimistic about Taiwan, they would be willing to exchange US dollars for NT dollars and invest in Taiwan. That kind of capital flow represents the recognition of Taiwan’s economic strength, industrial competitiveness and market potential.
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