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3 Feb 2021
CaelusWatch: What’s Hot in Taiwan’s Investment Market?
by Candice Wan, Analyst, Caelus Hong Kong Office

Global stock markets plummeted at the beginning of the outbreak of COVID-19, but the year ended on a strong note. Given an ultra-low interest rate environment, investors are gravitating towards the stock markets for higher returns from investment, turning a blind eye to the highly speculative, volatile, and overvalued market, and a stock market bubble risk. The U.S, Hong Kong, Taiwan, Korea, India stocks markets all made history and hit all-time highs towards the end of 2020 and beginning of 2021. In the current bull market, we have noticed that in Taiwan, ETFs are popular as ever, and we expect that 5G will be the talk of the town in 2021.

Fast-Growing ETF Market
While it is often a smart choice to achieve a diversified investment portfolio, defensive tactics are particularly useful when investing in an unstable market, and ETFs are one of the “safer” choices when trading public stocks.

Taiwan stocks have skyrocketed, and the popularity of ETFs with heavy exposure to “Guardian Shenshan” stocks, especially TSMC, outperformed those that do not, and the gains have surpassed the broader market. The Taiwan Capitalization Weighted Stock Index (TPE: TAIEX) set a record high on 21 January 2021, with a surge of 347 points, closing at 16,153 points. Serving as one of Taiwan’s key stock market indicators, Taiwan Semiconductor Mfg. Co. Ltd. (TSMC) (TPE: 2330) alone contributed almost a 222-point rise in TAIEX on the same day. “Guardian Shenshan stocks” refers to stocks of Taiwanese electronics manufacturing companies that are considered pillars of Taiwan and “guard” Taiwan’s economy. Recently, Germany has even urged Taiwan to persuade these companies to help ease a global shortage of auto chips which hampered car production amid COVID-19. The top 4 “Guardian Shenshan stocks” include TSMC (台積電) (TPE: 2330), MediaTek (聯發科) (TPE: 2454), Foxconn (鴻海) (TPE: 2354), and Delta (台達電) (TPE: 2308).
Almost all the top ETFs today are two-fold leveraged, and their rising stock prices reflect the multiplied benefits of the amazing performance of their underlying “Guardian Shenshan” stocks. The surge in prices of the high-volume Taiwan ETFs with TSMC exposure also reflects TSMC’s influence as the world's largest contract chipmaker. The economy of Taiwan also relies on TSMC as a market indicator. In less than a month this year, TAIEX has risen 9.65% and soared 1,421 points. TSMC (TPE:2330) alone has already risen by 18.87% this year and soared 354% over 5 years, which is far higher than the broad market.

Among the ETFs with TSMC exposure, the Fubon Taiwan Technology ETF (TPE: 0052), of which TSMC weight at about 72% as at 31 December 2020, is up 17.56% this year.

Freshly launched in 2021, the Cathay Taiwan 5G Plus ETF (TPE: 00881), with approximately 30% of its portfolio investing in TSMC, also has an exposure to the highly-regarded investment theme -- electric vehicle. Its price has climbed 15.54% since the beginning of 2021, expanding its AUM to exceed NT$30 billion (US$1bn).

Besides, Yuanta Global NexGen Communication Innovative Technology ETF (TPE: 00876), the first 5G-themed ETF in Taiwan known as the “hard 5G ETF”, with an allocation of less than 10% in TSMC, has increased by 42% in the first six months of its establishment.
The market prices of the four individual “Guardian Shenshan” stocks are much higher than the ETFs that invest in them, meaning that the threshold is higher when investing in individual “Guardian Shenshan” stocks. ETFs can also reduce volatility in the prices of constituents. Taking the Yuanta/P-shares S&P Custom China Play 50 ETF (TPE:0054) as an example, although Foxconn (TPE:2354) is the highest-weighted stock in the ETF’s portfolio, the ETF’s past-year performance is better than the individual stock, benefitting from the positive performance of other constituents in the ETF. Also, on 28 January 2021, the closing stock price of Foxconn was TW$77.20, much higher than that of the ETF at TW$30.14. In other words, ETFs keep costs low, removes the need for investors to constantly keep track of the earnings reports from individual stocks, hence the popularity of ETF among Taiwanese investors.

Talk of the Town – 5G
Speaking of the most popular investment themes in 2020 in Taiwan, 5G is undoubtedly at the top of the list. The Taiwan government is actively pursuing a nationwide 5G network coverage over the entire island as soon as possible, and Chunghwa Telecom (TPE:2412) expects to build over 10,000 5G base stations in Taiwan by the end of 2021.

The hype of 5G largely comes from its huge business opportunities in the next few years. 5G has immense intrinsic possibilities for the integration of digital platforms, and it can be broadly applied across endless industries such as telemedicine, remote education, machine learning, automated manufacturing… According to Yuanta and Cathay Financial Holdings, global investments in 5G-related industries in 2020-2035 will reach US$4 trillion, covering 38 countries and 92 telecom operators. It is expected that the commercialization of 5G will generate business opportunities worth US$12.3 trillion and 22 million job opportunities.

Realizing the vast scale and the revolutionary potential of 5G, investors who are unsatisfied with the performance of the broader market are jumping on the 5G bandwagon. The most hassle-free way would be investing in global technology funds or ETFs to grasp 5G-related opportunities, further pushing the popularity of 5G-related ETFs.

The author is a Securities and Futures Commission licensee, and no part of the author’s compensation was, is, or will be, directly or indirectly, related to the specific material contained herein. The author does not personally hold the mentioned relevant shares.

The commentary, news, research, analysis, prices and other information published in this column can only be viewed as general market information, which is for reference only and does not constitute investment advice. Caelus Asset Management Limited is not responsible for errors, inaccuracies or omissions in the information, and does not guarantee the accuracy or completeness of the information, text, diagrams, connections or other items contained therein. The company shall not be liable for any special, indirect, joint or consequential damages caused by the materials, including but not limited to loss, loss of income or loss of profit.