Taiex May Rise 40% More by Year-end, JPMorgan Says

By Chen Shiyin

April 28 (Bloomberg) -- Taiwan’s Taiex index may rise another 40 percent by the end of the year, extending gains that have helped the market to the world’s sixth-best advance, JPMorgan Chase & Co. said.

The Taiex index may climb to 8,000, compared with an earlier forecast of 6,000, because of a decline in the market’s political risk premium, improving ties with China and signs of better economic data and earnings growth, JPMorgan analysts led by Nick Lai wrote in a report. The target is 40 percent higher than the Taiex’s close yesterday.

The Taiwanese stock benchmark has gained 24 percent this year, outpacing 84 other global indexes tracked by Bloomberg and the MSCI Emerging Markets Index, which has climbed 11 percent.

“Data points over the past month show early signs of stabilization,” the JPMorgan analysts wrote. “We recommend that investors take positions on any major pull-back.”

Taiwan is seeking to bolster ties with China amid a slowdown in the island’s $355 billion economy. The island’s economy may contract 2.97 percent this year, the government forecast in April, reversing its November estimate of 2.12 percent growth.

Goldman Sachs Group Inc. today raised its 2010 economic growth forecast for Taiwan to 3.5 percent from 2.5 percent as improved relations with China start to benefit businesses. It said the economy will shrink 7 percent this year, less than an earlier prediction of a 7.5 percent contraction, Enoch Fung, a Hong Kong-based economist at Goldman Sachs, wrote in a report.

Weekend Talks

China and Taiwan will set up a supervisory mechanism enabling their financial services companies to operate in each other’s markets, according to an accord signed over the weekend following talks in the eastern Chinese city of Nanjing. They also agreed to more than double weekly direct flights to 270 from 108.

Ties between Taipei and Beijing have improved since the President Ma Ying-jeou’s Kuomintang party took office in May and dropped the pro-independence stance of his predecessor, Chen Shui-bian. Both parties are expected to meet for a fourth time later this year.

In Taiwan, investors should be “neutral” in financials and “overweight” in technology, JPMorgan said. The brokerage also raised its rating on shares of Taiwanese banks, brokers and insurers to “overweight” from “neutral” in its regional financials portfolio, citing the prospects for ties with China.

Yuanta, Sinopac

It upgraded Yuanta Financial Holding Co., Sinopac Financial Holdings Co., and Chinatrust Financial Holdings Co. to “overweight” from “neutral,” and raised its recommendation on First Financial Holding Co. and Chang Hwa Commercial Bank to “neutral” from “underweight,” according to a separate report by the brokerage.

Gains this year have made the market more expensive. The Taiex is valued at 26 times reported earnings, higher than its five-year average of 16 times. That’s as earnings decline by about 70 percent this year, after a 60 percent slump in 2008, JPMorgan estimated.

Still, profit growth next year will be “significantly higher” than in 2009, helping drive gains in the island’s stock market, the brokerage said.

Emerging-market fund managers are also “underweight” on Taiwan by about 2.7 percentage points, JPMorgan said. A change in that view to “neutral” will draw about $3.1 billion of funds into the stock market, the brokerage added.

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