(Bloomberg) -- This year’s unexpected 20% rally in Taiwan stocks is poised to close a final chapter in the history of its financial markets.
The Taiex index is within 7% of its all-time high from 1990, a milestone that analysts say will likely be topped next year. That year marked the bursting of the bubble in Taiwan stocks, which had rallied even more than shares in Tokyo. Taiwan’s recovery contrasts with Japan’s Nikkei 225, which peaked around the same time and remains 40% below its record.
Analysts say a humming economy will keep adding momentum to Taiwan’s financial markets, and next month’s presidential election won’t get in the way. The Taiex has risen 50% since Tsai Ing-wen was elected in January 2016 despite Taiwan’s relations with China worsening after she refused to endorse Beijing’s bottom line that both sides belong to “one China.” Tsai is widely expected to win re-election.
For export-dependent Taiwan, things ultimately circle back to trade. Increased U.S. orders and some Taiwanese companies moving manufacturing back to the island from China amid government incentives have helped make Taiwan a surprise trade-war winner.
“The relations of the U.S., China and Taiwan are like a triangle,” said Quincy Liu, chairman of Shin Kong Investment Trust Co. “Many Taiwan industries and companies are in fact benefiting from the U.S.-China trade war, so it reduces the impact of worsening cross-strait relations.“
Investor focus this year has been on technology, which makes up the bulk of Taiwan’s stock market. Some thanks go to Apple Inc (NASDAQ:AAPL)., whose iPhone sales have improved and powered its shares to record highs. Many component suppliers are based in Taiwan.
“There has been strong inflow into the technology sector, driven by optimism” about the iPhone, said UBS Securities Ltd. analyst William Dong. The just-starting wireless transition to 5G has also been attracting investors to Taiwan stocks, he added, with the liquidity likely to continue supporting the market in 2020.
Taiwan stocks, 40%-owned by foreign investors versus 30% a decade ago according to Taiwan’s market regulator, are in a much different place than 30 years ago.
The Taiex doubled in both 1987 and 1988, nearly did so in 1989 and jumped 30% in the opening six weeks of 1990, a several-year surge which occurred as the Taiwan dollar strengthened on foreign inflows after dropping its peg to the U.S. currency. After the Taiex’s bubble burst, the index plunged 80% in eight months.
“There were only retail investors back then,” said Andrew Tsai, chairman of Capital Investment Management Corp.
Factors attracting foreign capital to Taiwan has been steady economic growth during Tsai’s term, which started amid a mild recession in the wake of China’s 2015 stock-market slump.
The government recently raised economic forecasts for this year and next, and growth has been quickest of the so-called Asian tigers --which include recession-hit Hong Kong. Exports rose from a year earlier in November, the latest data point showing Taiwan’s economic strength. The outperformance has helped reverse 2018’s net equities selling by foreigners.
Taiwan stocks have also historically been income producers, with Taiex components having a roughly 4% dividend yield in recent years. That’s among the world’s highest, and an increasingly attractive metric for foreign investors as trillions of dollars of government debt sports negative yields. That’s not seen changing as this year’s policy easing by central banks is poised to continue in 2020.
“If global interest rates are still low next year, the Taiex with a 4% dividend yield is key to investors,” said Agnes Lin, a global market strategist at JPMorgan (NYSE:JPM) Asset Management Taiwan Ltd. But a concern of hers is Taiwan stocks aren’t cheap despite projections of double-digit earnings growth next year.
The Taiex has traded of late at the highest price-to-earnings levels in five years versus both the Shanghai Composite Index and the MSCI Asia Pacific Index.