(Oct 7): Foreign investors are sitting on billions of dollars of cash in Taiwan, an encouraging sign for equity bulls predicting that a recent market decline will be short-lived.

Global funds sold US$16.9 billion (RM72.2 billion) of shares on a net basis on the Taiwan Stock Exchange between January and September, but they still injected US$29.5 billion of capital into the island on a net basis during the same period, suggesting that despite recent profit taking, they still have plenty of cash to invest in Taiwanese stocks.

“The increasing foreign capital in Taiwan indicates foreign investors are still bullish on Taiwanese stocks, and will likely seek a good window to gain positions again,” said Xiadong Bao, the fund manager of Edmond de Rothschild Asset Management in Paris.

The dry powder available to foreign investors shows how quickly money may flow back into Taiwanese stocks that have benefited from the artificial intelligence (AI) boom, including Taiwan Semiconductor Manufacturing Co (TSMC), the world’s leading contract chipmaker, and Hon Hai Precision Industry Co, a crucial supplier to Apple Inc. The two stocks surged during the first half of 2024 but have since lost momentum, amid worries about the sustainability of the AI investment rush.

The local benchmark Taiex index is up 26% this year, despite falling after hitting an all-time high in July. That’s a better performance than regional peers such as South Korea and Japan, although it has been eclipsed by Hong Kong following the recent buying frenzy in Chinese shares.

Investors are now closely watching earnings from Taiwanese companies to see whether spending on AI is still providing big revenue growth for tech manufacturers. TSMC is set to report its third-quarter results on Oct 17, while Hon Hai Precision, also known as Foxconn, will brief investors on Nov 14.

Taiwan has long been an attractive market for global investors, and net inflows from overseas funds hit US$275 billion on a cumulative basis in September. That was just a tad below June’s record high since Bloomberg began tracking the data in 2007, after the pace of inflows slowed in the second half.

The recent rally in Hong Kong and mainland China may lead to “some near-term rotation from Taiex to China”, said Gary Tan, a portfolio manager at Allspring Global Investments. He said it doesn’t alter his overall optimism on Taiwanese stocks, adding that he wants to gain more exposure to Taiex as the valuation gap between Taiwan and mainland China narrows.

The Taiex currently trades at 16.2 times forward earnings estimates. While it is still slightly above its five-year-average, the level is down from around 20 times projected earnings in July. 

“Ultimately, I think that investors will pay for growth, and the Taiex has hitched itself to the winning AI horse,” said David Chao, a strategist at Invesco Asset Management. 

Uploaded by Tham Yek Lee