International | Aug 29 2006
By Chris Shaw
With the Taiwanese economy showing signs of slowing down ABN Amro has moved to go underweight the market in its Asian asset allocation model, pointing to the poor expected growth outlook for corporate earnings as a reason to stay out of the market.
It is a view shared by Citigroup, which regards the Taiwanese market as the most prone to downward earnings revisions in the region. The broker points out companies most at risk are those exposed to exports, as a slowing in the US economy is likely to have a downward impact on prices for exporters.
ABN Amro’s move follows growth figures earlier this month showing the economy slowed in the June quarter as GDP growth came in at 4.57%, down from 4.93% in the March quarter. Market consensus is for further slowing before the end of the year, with the average forecast for growth for 2006 now coming in at around 4.4%.
The continuing restrictions on cross strait business is one reason for the worsening outlook, as it means companies find it very difficult to deal with the bureaucratic regulations that are part of doing business with China. This has led businesses to push the government for changes to the restrictions, which they claim are limiting their ability to grow domestically and forcing companies to look into moving facilities offshore.
As a result ABN Amro estimates only 71% of exports orders received by Taiwanese companies are now filled domestically, a ratio the broker expects to fall to less than half in coming years.
Growth figures back up the claims of businesses to some extent, as in the period from 2001 to 2005 Taiwan’s growth averaged 3.3%, well below that of Korea at 5.4%, Hong Kong at 8.2% and Singapore at 8.4%.
ABN Amro notes the slowdown can also be seen in corporate earnings, as on its estimates the 12-month forward earnings per share (EPS) outlook is only 2% higher than it was in 2001, which compares poorly to the 70% increase in earnings enjoyed by neighbour Korea, which also has a cyclical economy.
The broker acknowledges the market looks cheap at current levels, but argues this is deceptive given the hollowing out of the manufacturing sector and the longer-term impact this will have on profits. As a result it has cut its weighting on Taiwan to Underweight from a Neutral position previously, choosing instead to lift exposure to both Malaysia and Thailand instead.
