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SGX Can the Wave of Funds Turn Around Taiwan's Tide of Fortune

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April 2017

 

Market Updates

 

 

 

 

 

 

 

 

 

 

 

 

Can the Wave of Funds Turn Around Taiwan’s Tide of Fortune?

  • Global money managers chasing Apple Inc. suppliers bolstered Taiwan assets this quarter. The main Taiex index was up 6%, driven by electronics stocks including iPhone assembler Hon Hai Precision. Global investors poured US$5.9 billion into the island’s equities this year, the second-highest in Asia only to India, amid optimism that the new iPhone will boost earnings.

     
  • In March, the benchmark rose to almost 10,000 index points– a level that has not been crossed in almost 17 years. The local dollar strengthened more than 6% against the greenback for its biggest quarterly gain since 2008.

 

  • Tracking the Taiex index closely, the MSCI TW IndexSM climbed to a high of 369.57 index points on 21 March 17. Our March month-end open interest grew 33% year-on-year. As of 27 March 2017, open interest reached 276,107 contracts, or approximately US$10 billion in notional value.

 

On the back of a strengthening Taiwan dollar as well as strong institutional buying – the main Taiex index surged to a near record-high in March. The benchmark index rose to almost 10,000 index points – a level that has not been crossed in almost 17 years. Global investors poured US$5.9 billion into the island’s equities this year, the second- highest only to India.

 

The MSCI TW IndexSM , which has a correlation of 95% to the main Taiex index, soared to 369.57 index points in March, the highest since January 2015. In tandem, the Taiwan dollar has increased close to 6% since the start of the year.

Risk-reward ratio still seems to favour Asian markets

 

Asian markets seem to be providing investors with an attractive landing spot. While the MSCI USA index has a forward price-earning ratio of 18 times, the rest of the major Asian markets such as China, Taiwan, Korea, Singapore are all trading below 14 times. For now, the risk-reward ratio seems to favour Asian markets.

 

In Taiwan, shares in Taiwan Semiconductor Manufacturing Co., the biggest semiconductor-chip supplier, which has a 29% weightage in the MSCI Taiwan index, have climbed by 5% since the start of the year. The other major Apple supplier, Hon Hai Precision (also known as Foxconn), which has a weightage of 8% in the index, has surged by 16%. It rose from TWD84 to TWD98 since the start of the year, after posting a surprising 30% increase in net profit for the fourth quarter of last year. The MSCI TW IndexSM has a year-to-date return of 7%, outpacing the 5% gain in S&P500  and other regional indices.

Is The Rally Sustainable ?

 

Notwithstanding the recent strong performance of the Taiwan market, analysts have warned that the recent rally in Taiwan’s stocks and currency may be hard to sustain. “Normally, people will just get off before 10,000,” said Liu Tsung- sheng, president of Taipei-based Yuanta Securities Investment Trust Co. The Taiwan dollar’s gains will hit industries such as exports and insurance, he added.

 

There are concerns of a possible pull back in Taiwan dollar on the back of foreign investors selling Taiwan equities and sending funds back to U.S. At Asia’s largest and most diverse Asian FX exchange, SGX’s TWD/USD futures is the first exchange listed TWD futures in the world and it provides investors and traders a direct, safe, transparent and efficient venue to hedge currency risks.

 
SGX MSCI Taiwan Index Futures

 

With 88 constituents, the MSCI TW IndexSM is designed to measure the performance of the large- and mid-cap  segments of the Taiwan market. The index covers 85% of the free float-adjusted market capitalisation in Taiwan.

 

Our open interest in the SGX MSCI Taiwan index futures has been increasing as participants continue to use our futures contract for risk-management purposes. The month-end open interest for SGX MSCI Taiwan Index Futures has gained 33% year-on year. As of 27 March 2017, open interest reached 276,107 contracts, or approximately US$10 billion in notional value. The T+1 session, which ends at 4:45am since 14 November 2016, allows market participants to trade price movements during European and US hours. The bid-ask spread during the T+1 session stands at an average of 1-2 ticks, allowing participants to take advantage of or hedge against price movements during European and US hours.

 

In addition, our SGX MSCI Taiwan Index Futures/Options remain available for trading on all onshore holidays, with the exception of New Year’s Day (1 January). Margin discounts on spreads formed with other SGX derivatives allow for greater capital efficiency for investors that has views on multiple Asian markets.

 

Cross-Product Margin Offsets (As of 10 April 2017)

 

Contract

Contract

Margin Offset

SGX FTSE China A50 Index Futures

SGX MSCI Taiwan Index Futures

50%

SGX USD Nikkei 225 Index Futures

SGX MSCI Taiwan Index Futures

50%

SGX MSCI China Index Futures

SGX MSCI Taiwan Index Futures

35%

SGX Nifty 50 Index Futures

SGX MSCI Taiwan Index Futures

50%

SGX MSCI Singapore Index Futures

SGX MSCI Taiwan Index Futures

50%

SGX Nikkei 225 Index Futures

SGX MSCI Taiwan Index Futures

50%

SGX TWD/USD Futures (wef 13 April)

SGX MSCI Taiwan Index Futures

65%

 

Key Economic Events

 

Date

Event

Period

Economist Survey Median

Prior

20 April 2017

Export Orders YoY

March

-

22%

24 April 2017

Unemployment Rate

March

-

3.83%

28 April 2017

GDP YoY

1 Q P

-

2.88%

2 May 2017

Taiwan PMI mfg

April

-

56.2

5 May 2017

CPI YoY

April

-

0.18%

 

Source: Bloomberg

 

 

Contract Specifications

 

 

 

RISK DISCLAIMER: Trading in futures products entails significant risks of loss which must be understood prior to trading and may not be appropriate for all investors. Past performance of actual trades or strategies cited herein is not necessarily indicative of future performance. The information contained herein is provided to you for information only and believed to be drawn from reliable sources but cannot be guaranteed; Phillip Capital Inc. assumes no responsibility for errors or omissions. The views and opinions expressed in this letter are those of the author and do not reflect the views of Phillip Capital Inc. or its staff.