Taiwan is likely to be a bright spot of the Asian economy in 2021. Not only are its domestic growth prospects good, but its capital markets are a gateway to the wider Asian economy, affording institutional investors exposure to other regional economies that are likely to post strong COVID-19 recoveries.
Taiwan’s pandemic resilience
Taiwan has navigated COVID-19 better than most.1 Its rapid response to the pandemic, conditioned by its experience of the 2003 SARS outbreak, allowed life to continue mostly as normal through 2020. Taiwan’s COVID vaccination roll-out began in March, and the government has secured 20 million vaccine doses, with another 10 million in the pipeline.
Taiwan’s economic data reflect this performance. It posted GDP growth of 3.11 per cent last year, even as some nearby economies saw sharp recessions, and Standard Chartered forecasts an even stronger performance in 2021, at 4.4 per cent. Exports are one reason for this optimism. The pandemic has supported a surge in demand for electronics, due to a rapid shift to digital working, commerce and entertainment, and this tech cycle is still going strong. This should support Taiwan’s growth in the first half of this year at least, given its importance to electronics supply chains.
Moreover, the US and China, which are also projected to achieve strong growth rates, make up half of Taiwan’s exports. Domestically, consumer demand should also be supported by positivity surrounding the pandemic recovery. Unemployment is back down below 4 per cent, and consumer confidence is high.2
There are some downside risks. Overseas buyers have stockpiled inventory for fear of further lockdowns, which may potentially reduce demand from Taiwan as they unwind these. A drought before the rainy season could impact the production of semiconductors if the government cuts water supplies to companies.3 New laws to cool the housing market may dampen growth, as might the fallout of further US restrictions on trade with China. Nevertheless, Taiwan is likely to be one of the bright spots of growth in Asia in 2021, and an attractive destination for foreign institutional investors (FINIs).
The reasons for FINIs to choose Taiwan go beyond its strong macro fundamentals. It has one of the most active securities markets in the Asia-Pacific, with 944 companies listed on the TWSE as of June 2020, with a market capitalization of more than $1.19 trillion – equivalent to 193% of Taiwan’s GDP - and an overall market P/E ratio of 19.73. In the first half of 2020, the concentrated market trading value was more than USD6 billion, with a market turnover rate of 55.47%.
“Taiwan is basically the only exchange in the world where FINIs can access and hedge essentially all of Asia in US dollars and in accordance with US regulations,” noted Yujun Lin, Head of Project Management for Equities at SGX, at a Standard Chartered webinar on 8 April. “We’re in the unique position of having product coverage across all major Asian economies, such as China, India, Japan, Taiwan and Southeast Asian countries. We cover 99 per cent of Asian GDP with our products.”
Lin noted that following a period of rapid recent growth, 30 per cent of all activity on SGX’s FTSE Taiwan Index futures is now traded overnight by US and European investors. Its popularity is explained in part by how easy Taiwan makes it to comply with US regulations. For instance, the FTSE Taiwan RIC Capped Index, which underlies the SGX futures contract and which offers well-diversified exposure to the Taiwanese economy, is designed to meet the Regulated Investment Company (RIC) concentration requirements for US-registered funds, with semi-annual reviews to limit concentration in any one security.4
A guide to Taiwan’s markets
Experienced local partners can ease FINIs’ access to Taiwan’s markets. The first step is to appoint a custodian bank to register with the Taiwan Stock Exchange, which normally takes one business day. Standard Chartered is the leading custodian bank for FINIs in Taiwan, with 28 per cent market share.
After registering and obtaining an investment ID from the stock exchange, the FINI can proceed with account-opening in its registered name. This includes opening segregated securities and Taiwan dollar cash accounts with its custodian bank and opening a segregated depository account with a depository through its appointed custodian bank. FINIs can also then open a securities trading account with their local brokers, which takes between three and seven days depending on the brokers’ KYC process. While the process is still paper based, Standard Chartered is working with the local financial infrastructures to drive digitization and speed up the market entrance process.
Taiwan’s government requires FINIs to invest 70 per cent in equity instruments, and no more than 30 per cent in non-equity instruments. As a custodian, Standard Chartered helps clients monitor their daily investments and notifies them via email when they come close to the upper limit of this ratio, which is calculated on a net inward capital remittance basis.
Once registered, FINIs in Taiwan can invest in a wide variety of assets, including equities, fixed income, exchange-traded funds, mutual funds, money market instruments, exchange-traded notes, asset-backed securities and derivatives. FINIs are also allowed to participate in securities- borrowing and lending. Standard Chartered is the first in the market to co-create digital start-of-day securities position reporting with the Taiwan Depository to assist FINIs with investment risk management prior to stock market opening.
This flexibility and range of assets, coupled with the optimism surrounding its domestic economy and those of its key trading partners, makes Taiwan an attractive destination for FINIs in 2021. It is an optimism that Standard Chartered shares. Asia’s seventh-largest economy is well placed to help Asia recover from the shocks of 2020, while rewarding global investors seeking to participate in that recovery.
1 Shih-Chung Chen, 2021, "Taiwan’s experience in fighting COVID-19", Nature, 26 March https://www.nature.com/articles/s41590-021-00908-2
2 Crystal Hsu, 2021, "Consumer confidence highest in a year", Taipei Times, 30 March https://www.taipeitimes.com/News/biz/archives/2021/03/30/2003754712
3 Debby Wu and Cindy Wang, 2021, "Taiwan Cuts Water Supply for Chipmakers as Drought Threatens to Dry Up Reserves", Bloomberg, 24 March https://www.bloomberg.com/news/articles/2021-03-24/taiwan-raises-red-alert-over-water-cuts-supply-for-chipmakers
4 SGX, 2020, "SGX FTSE Taiwan Index Futures contract trading exceeds US$1.5 billion during launch week", https://www.sgx.com/zh-hans/research-education/market-updates/20200727-sgx-ftse-taiwan-index-futures-contract-trading-exceeds