Taiwan Stock Rally to Pause Next Quarter, Deutsche Bank Says

By Chen Shiyin

March 19 (Bloomberg) -- Taiwan stocks, the world’s third- best performers this year, will probably “take a break” in the second quarter once investors finish covering their short sale positions, Deutsche Bank AG said.

The island’s shares are more expensive than stocks elsewhere in the region even as concerns about the outlook for economic growth and earnings remain, Deutsche Bank analyst Julian Wang wrote in a March 18 report. Total short positions are at a 30-month high and the need to close them may provide a short-term boost to the market, the report said.

“We continue to reiterate our view that fundamentals lack visibility,” Wang wrote. “Given the nature of the short cover, we do not recommend that long-term investors chase the current rally.”

Taiwan’s Taiex index has jumped 11 percent this year, lagging behind only China and Venezuela among the 89 global stock gauges tracked by Bloomberg. Gains this year have pushed valuations of companies traded on the measure to 23 times estimated earnings, compared with 11 times for the MSCI Asia excluding Japan Index.

Total stock loans on the Taiwan Stock Exchange gained fourfold in the past four months to 715.6 million shares, according to data tracked by Bloomberg. So-called short sellers borrow securities and sell them on hopes of capturing a profit by replacing them after prices fall.

Investors are required by regulators to close all short positions at least 66 days prior to the companies’ next annual general meetings, Deutsche Bank said.

This will result in “buying interest” in companies that have higher short positions, including Epistar Corp. and Largan Precision Co., the analyst said.

Epistar, the island’s No. 1 maker of light-emitting diodes, has rallied 83 percent this year, while Largan, a manufacturer of components for optical lens, has gained 38 percent.

Investors should return to short-selling the market next quarter or “sell into strength” over the next few weeks, Wang advised. The gains by technology shares this year means investors should consider financial stocks, he added.

To contact the reporter on this story: Chen Shiyin in Singapore at schen37@bloomberg.net.