23 October 2016
Taiwanese expect Tsai Ing-wen, who is due to take over as president in May, to turn around the economy. Photo: Reuters
Taiwanese expect Tsai Ing-wen, who is due to take over as president in May, to turn around the economy. Photo: Reuters

Taiwan stock market to rise as new government takes over

Given that the Hong Kong and mainland stock markets are unstable at present, investors might take a look at other markets; for example, Taiwan.

Two factors will benefit the Taiwan stock market.

First, the market expects Taiwan to cut the key interest rate later this month.

The interbank offered rate usually moves in line with the discount rate.

The Taiwanese central bank seems to have been proactively leading the interbank offered rate to lower levels, reflecting its intention to cut the interest rate.

Since September, the central bank has cut the interest rate twice, to the current level of 1.625 percent.

Nomura expects Taiwan to cut the interest rate four times this year, to about 1.125 percent.

The major reason is to boost the economy.

Taiwan’s core inflation rate rose only 0.8 percent year on year in February, while exports shrank by 11.8 percent from a year ago after a decline of 12.9 percent in January.

Lower interest rates may encourage banks to lend more and companies to increase investment.

They would also weaken the Taiwan dollar and boost exports.

Second, the newly elected president, Tsai Ing-wen, is due to take over in May.

Taiwan’s residents expect her to turn around the economy.

A cut in the interest rate would benefit Taiwan’s stock market, so investing in Taiwan ETFs may be a smart choice.

There are five ETFs listed in Hong Kong that track Taiwan stocks.

Meanwhile, there is also an increasing number of ETFs listed in Taiwan.

Among the 39 ETFs listed there, 12 are leveraged or inverse ETFs, allowing investors to make short-term bets on the Taiwan, mainland Chinese, Hong Kong, Japanese and US stock markets.

Since the leveraged and inverse ETFs launched in Taiwan in September 2014, the transaction volume of ETFs has increased notably.

The average daily transaction volume was only about NT$270 million (US$8.2 million) in September 2014. It rose to NT$7.6 billion in February.

Hong Kong’s stock market regulator is about to give the green light to leveraged and inverse ETFs this year.

The move is expected to provide more hedging tools for investors while diversifying the opportunities in the local ETF market.

This article appeared in the Hong Kong Economic Journal on March 15.

Translation by Myssie You

[Chinese version 中文版]

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Associate Director at Value Partners Limited

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