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This has been a particularly challenging period for technology shares, including handset component manufacturers, PC makers and semiconductor manufacturers, which have been hit hard by profit warnings and poor results from the electronics giants such as Apple, Motorola and Intel, according to Louisa Lo, head of Asia equities at Schroder Investment Management.
Lo, who last month was already warming to Taiwanese technology shares due to their attractive valuations, says Schroders recently raised its weightings of blue-chip electronics stocks such as Hon Hai, TSMC, and Siliconware. After all, the indiscriminate sell off in Taiwanese tech names has created some good buying opportunities for long-term investors. Most of these companies are either in a net cash position or have very strong financial standings, with the 4%-8% dividend yield providing better downside protection.
ôBetter supply discipline and relatively lean inventory levels also mean that some blue-chip technology companies are much better positioned to weather the latest slowdown compared to the last US recession in 2001,ö Lo says.
While Schroders sees good value in some tech names, its Schroder ISF Taiwanese Equity has adopted a more balanced portfolio through its exposure to domestic consumption stocks, select asset plays and stocks with strong dividend yield support. These stocks are likely to benefit from any pick up in local investor sentiment and a stronger domestic currency, Lo says.
The fund has also raised its position in financials. Taiwanese financials have also been sold down heavily amid fears of subprime exposure and uninspiring results.
Schroders has added to broker shares, which are trading at very low price-to-book values and are a good leverage play on market liquidity. The firm has also topped up on Cathay Financial, believing the recent share price overhang driven by this companyÆs US subprime exposure is overdone. Being one of the largest landlords in Taipei, the company is likely to benefit from a pick up in asset reflation, as the local political landscape improves after the presidential election, Lo says.
Schroders remains underweight on cyclical stocks, shipping, plastics, petrochemical and steel companies, which reflects the firmÆs cautious view on global demand. Further China tightening could also hurt sentiment among commodity stocks.
Political gridlock, sluggish domestic consumption as well as a poor global tech demand, have all contributed to the de-rating of the Taiwanese stockmarket in the past. Looking ahead, Schroder believes the external environment and domestic politics are the two key factors that will drive TaiwanÆs market performance in the coming months. The market historically has had a high correlation with the Nasdaq Index due to its high weightings in the tech sector and strong reliance on exports. And with the increasing likelihood of a US recession and much slower consumer demand in the US and potentially in Europe, the market is facing increasing headwinds to perform in the near-term.
BeijingÆs tightening measures are also likely to have a knock-on effect on China concept stocks in Taiwan, adding to the volatility in the stockmarket, Lo says. However, local politics is an area requiring close monitoring, as a favourable election result could trigger a short-term bounce in the market.
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