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ôWelcome to the worst performing stock market in Asia ex-Japan,ö Citi Taiwan strategist Peter Kurz writes in a recent report.
Indeed, Taiwan posted a 1% decline over the past 10 years compared with the average 90% rise of the regionÆs benchmark indices, with the market giving up the entirety of its outperformance during the tech boom of the late 1990s, Kurz notes.
Despite TaiwanÆs low valuations and high earnings growth over the past few years, the market has consistently disappointed, dragged lower by a badly deserved de-rating after global demand for personal computers declined starting with the much-hyped Y2K problem; the anti-China investment policies have stifled capital spending in both Taiwan and China; and the instability in domestic politics and cross-strait relations, says Kurz.
ôYet we believe 2008 should be a key turning point for Taiwan,ö Kurz says. ôRelative valuations have reached an all-time low, with the exception of the aftermath of the 1999 earthquake.ö
Citi regional strategist Markus Rosgen points out that all the signs show that Taiwan shares should be doing better at this point, but the market so far has run counter to the regional trend is all value and no momentum.
Being a long-term laggard means Taiwan now offers good value in absolute and in relative terms, Kurz says.
He also expects politics to undergo a fundamental transition. ôThe March 22 presidential election will bring in a new leader who we expect to at least soften and at best reverse the anti-China economic policies of the past decade.ö
He also expects capital outflow to ease after reaching a crescendo in 2007, largely due to concerns about the impending implementation of global taxation and in search of high overseas returns.
Next year also marks the introduction of new accounting rules that will bring Taiwan in line with international accounting standards on the treatment of employee bonuses. This clarity will improve corporate transparency and remove the widely expressed concern about the quality of Taiwanese earnings and the extent of share dilution, he says.
Kurz says CitiÆs target for TaiwanÆs benchmark index is 12,000 for end-2008, which represents 42% upside plus a 6.5% gross cash yield including share buybacks and capital reductions as well as dividends, for a total return of 48.5%. The target has been set based on a trailing price/earnings ratio of 15.1 times and a forward P/E ratio of 14 times, a net total cash yield of 5.0%, and a price-to-money ratio of 3.1 times.
Product proliferation is among CitiÆs investment themes in Taiwan. As the personal computer matures as a product and a market, new products and components are developing to maintain growth momentum for the Taiwan tech sector, Citi notes. ôA number of these new products, such as smart phones, game consoles, digital photo frames, and e-books have begun already as small niche markets, but could grow quickly and, themselves, spin off a whole new range of derivative products.ö
Citi continues to underweight semiconductors and overweight IT Hardware, but given the uncertain outlook for exports, is most aggressively overweighting the domestic demand sector. It also continues to underweight materials and financials.
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