[Mangoman]

The re-election of Taiwanese President Ma Ying-jeou, a booster of closer ties with China, is bullish for the island’s financial markets, according to Bank Julius Baer & Co., Citigroup Inc. and Uni-President Assets Management Corp.

Julius Baer, which oversees about $205 billion in assets, is re-evaluating its “underweight” rating on Taiwanese equities and may buy airlines and hotel stocks, Lee Boon Keng, head of the firm’s investment solutions group in Singapore, said by phone yesterday. JPMorgan Chase & Co. upgraded Taiwan’s shares to “neutral” from “underweight.” Two-year bonds may rally as overseas investors buy Taiwan dollar assets, said Samson Tu, a Taipei-based fund manager at Uni-President.

Taiwan’s dollar fell 0.2 percent to close at NT$30.07 as Europe’s worsening debt crisis dragged most Asian currencies lower and the island’s bonds rose. The yield on 1 percent notes due January 2017 fell one basis point, or 0.01 percentage point, to 0.961 percent, prices from Gretai Securities Market show. The Taiex Index, the island’s benchmark stock gauge, closed 1.1 percent lower at 7,103.62, less than the MSCI Asia Pacific Index (MXAP)’s decline of 1.2 percent.

“In Ma’s second term, we could see not only continuation but probably an acceleration of cross-strait economic links and that will certainly be positive for the market,” Peter Kurz, Citigroup’s head of Taiwan research, said in a telephone interview yesterday. His team was ranked first for Taiwanese research by Institutional Investor from 2008 to 2010.

Closer Ties
Ma, the 61-year-old leader of the ruling Kuomintang Party, won a second four-year term after defeating Tsai Ing-wen, chairwoman of the Democratic Progressive Party, in Jan. 14 elections. Ma’s first term was characterized by the pursuit of closer ties with China through trade agreements and the ending of a six-decade ban on direct air, sea and postal links.

China regards Taiwan, ruled separately since the end of a civil war in 1949, as its own territory and mainland officials had warned that relations would suffer if Tsai won the weekend election. The DPP’s Chen Shui-bian had pushed for Taiwan’s recognition as a sovereign nation during his presidency that ended when Ma took office in 2008.

Ma won 51.6 percent of the votes cast to Tsai’s 45.6 percent, Taiwan’s Central Election Commission reported on its website. The commission said 74.4 percent of 18 million eligible voters cast ballots.

Bullish Bets
Options traders already anticipated Ma’s victory, placing increasingly bullish bets earlier this month on an exchange- traded fund tracking Taiwan stocks. The ratio of calls to buy the iShares MSCI Taiwan Index Fund versus puts to sell rose on Jan. 6 to the highest level since March 2008, two months before Ma was sworn in for his first term.

The Taiex reached an eight-week high on Jan. 11. The local dollar touched NT$29.880 on Jan. 12, the strongest level since Nov. 1. Benchmark 10-year bond yields declined two basis points last week to 1.29 percent, the lowest level among emerging markets. Five-year yields dropped three basis points last week.

“Ma’s win has eliminated worries and uncertainties in the bond market,” Uni-President’s Tu, who helps manage $1.6 billion of fixed-income securities. said by phone yesterday. “Two-year bonds may rally as foreign investors may buy Taiwan dollar assets to profit from a currency rally.” His firm is a unit of Uni-President Enterprises Group, Taiwan’s biggest food company.

Foxconn’s Gou
There was no trading on two-year securities today, according to data compiled by Bloomberg. Two-year bond yields fell three basis points last week to 0.79 percent, the best five-day performance since the week ended Dec. 16.

Ma was backed by Taiwanese executives who have said his cross-strait policies have boosted investment and helped the island’s economy grow. Terry Gou, chairman of Apple Inc. supplier Foxconn Technology Group (2317), predicted in a Jan. 14 interview with local television station TVBS that a Ma victory would cause a stock rally today.

The Taiex Index has matched the performance of the MSCI Asia-Pacific Index under Ma’s rule, whereas it lagged behind under Chen. Since Ma became president, the Taiwanese gauge is down about 24 percent, against the 25 percent drop for the MSCI measure. During Chen’s presidency, the Taiex rose 1.9 percent, while the regional index climbed 35 percent.

Chinese Partner
China and Taiwan signed an economic cooperation agreement in 2010, paving the way for the island’s financial services companies to expand their businesses on the mainland. Taipei- based Fubon Financial Holding Co. (2881), Taiwan’s second-largest financial services company, lost 4.6 percent since Ma’s inauguration on May 20, 2008, less than the Taiex index (TWSE)’s 24 percent slump. Fubon dropped 1.7 percent today.

The island’s stock exchange and its Shanghai counterpart are in talks to sign a memorandum of understanding on collaboration that will include authorization to compile indexes based on each other’s market data, Schive Chi, chairman of Taiwan Stock Exchange Corp., said in an interview today.

The removal of travel restrictions helped the number of Chinese tourist arrivals to jump 68 percent to 1.63 million in 2010, overtaking Japan as Taiwan’s biggest source of visitors.

Shares of Formosa International Hotels Corp. (2707), Taiwan’s largest hotel operator, retreated 5.2 percent since Ma’s inauguration. The Taipei-based company’s shares, which lost 0.4 percent today, are valued at 26.3 times estimated profit, compared with the Taiex’s multiple of 12.7. Fubon Financial trades at 10.4 times.

Property Rally
Farglory Land Development Co., the largest construction company in Taiwan, gained 1.2 percent to NT$50.80. Cathay Real Estate Development, the second-largest, advanced 1.5 percent to NT$10.25.

Property stocks are poised for a short-term rally after Ma’s victory as the DPP may have taken steps to lower real- estate prices had it won power, Dave Chiou, a Citigroup analyst, wrote in a report yesterday.

“The fact that the outcome is clear, the KMT not only won, but with a convincing majority, clearly it will allow for a fairly strong market rally in the short term,” said Citigroup’s Kurz, who is favoring technology companies. He’s maintaining his target for the Taiex to rise to 8,200 this year, 14 percent above last week’s close.

China’s Taiwan Affairs Office said in a statement issued through the Xinhua News Agency that Ma’s victory shows that the “peaceful development of cross-straits ties” in the last four years was “the correct path that has won the support of the majority of the Taiwanese compatriots.”

‘A Rat’
Financial markets slumped after the DPP’s Chen won the presidencies in 2000 and 2004. The Taiex fell 9.4 percent in the two days following his second victory, after he was shot while campaigning in his hometown of Tainan. The government bought stocks and the currency to stem losses.

A government-backed stock stabilization fund also supported the market in March 1996 when China test-fired missiles within about 30 miles of Taiwan’s two biggest ports in an attempt to intimidate people to vote against former President Lee Teng-hui, who published a state-to-state relations doctrine that led China to brand him “a rat.”

Europe’s debt crisis may still drag on Taiwanese equities in the next 12 months, said Jessie Zhang, manager of the Polaris Taiwan Top 50 Tracker Fund, the island’s largest fund.

“We are still an export-oriented economy,” Zhang said by phone from Taipei yesterday. “Ultimately, if the euro-zone crisis were to continue, any stock gains will be limited.”

Stronger Finances
Global equity markets lost more than $6 trillion in value last year as Europe’s debt woes and slowing economic expansion worldwide weighed on investor demand for riskier assets. Morgan Stanley said in a report on Jan. 13 Taiwan’s stocks will be “susceptible” to declines whatever the outcome of the elections as global economic concerns remain.

Taiwan’s dollar, the second-best performer in Asia in the past three months, advanced 0.3 percent in 2011, a third year of gains as investors favored economies with the strongest finances as Europe’s crisis worsened. The island’s debt is 33 percent of gross domestic product, half the ratio of the U.S., and its $386 billion foreign reserves are the fifth largest.

“In the long run, the continuation of Ma is positive for the country and the region; the economic cooperation between China and Taiwan should continue to develop,” Wee-Khoon Chong, a Hong Kong-based fixed-income strategist at Societe Generale SA, said by telephone yesterday. “The near-term optimism and long-term prospects are both positive for the Taiwan dollar.”

Chong recommends taking a long position on the currency versus a basket split between the U.S. dollar and the yen. A long position profits when an asset rises in price.

Largest Trading Partner
Ma’s election victory is conducive to the economic development of the island and China, Justin Lin, the World Bank’s chief economist, said in Beijing yesterday.

China passed the U.S. as Taiwan’s largest trading partner in 2002. Two-way trade reached $160 billion last year, according to Chinese customs statistics, a 10 percent increase from a year earlier. Under the first trade accord signed by the two sides in 2010, China agreed to open markets in 11 service sectors such as banking and to cut duties on Taiwanese imports worth $13.8 billion in 2009, or about 16 percent of the total.

“Taiwan’s economy is heavily geared towards exports and desperately needs to reinvigorate growth through greater China cooperation,” said David Pinkerton, chief investment officer at Falcon Private Bank Ltd., which has $13 billion of assets. “Taiwan’s two principal other customers, Europe and America, are showing slowing demand for exports.”

‘Positive Impact’
Exports rose 0.6 percent from a year earlier in December, the slowest pace in 26 months, finance ministry data show. The central bank left its benchmark rate unchanged at 1.875 percent for a second straight quarterly meeting last month. The government cut its 2011 economic expansion forecast to 4.5 percent and said growth will slow to 4.2 percent this year, after a 10.7 percent expansion in 2010.

Ma’s election victory “certainly will have a positive impact given what the Taiwanese have voted on really is to have a closer relationship with China,” Julius Baer’s Lee said. “Had the DPP won, it would be a destabilizing development. This is a step in the right direction.”

[Mangoman]

Ma Ying-jeou’ssecond term as president of Taiwan, secured in an election win three days ago, may be one of the island’s last opportunities to address the consequences of something unmentioned on the campaign trail: the world’s fastest-aging society.

Ma’s push for closer ties with China won a fresh mandate as he defeated Tsai Ing-wen, who said the tighter bonds may risk Taiwan’s autonomy. While Taiwan’s top planning body predicts the island’s population will start falling in 11 years, coping with an aging society and low birth rates were absent from the debate because the challenge is intractable, said Chuang Meng-han, an industrial economics professor at Tamkang University in Taipei.

Failure to tackle the change, by reducing the cost of raising families or allowing immigration, will leave Taiwan’s labor force shrinking, putting pressure on growth and asset prices. The economy’s trend rate of expansion is poised to fall to about 3.5 percent annually in the next decade, from 5.1 percent in the 20 years through 2010, according to DBS Bank Ltd.

“The impact will be huge,” said Chuang, who has analyzed the housing market. “Most people aren’t well-prepared for the aging society. The later the government faces the consequences, the more difficult they will be to deal with.”

Taiwan’s 2010 total fertility rate was 0.9 babies per woman, according to baseline estimates compiled by Taiwan’s Council for Economic Planning and Development. That’s less than in the 196 other countries and territories tracked by the United Nations. Taiwan’s 23 million population will fall to less than 19 million by 2060, according to the council.

Bear Market
By 2050, Taiwan will have an aging index of almost 413 percent, compared with Japan’s 339 percent, the CEPD estimates. That makes the island the most rapidly aging society, said Lo Yu-mei, a council researcher. The index is defined as the number of people aged 65 and over per 100 youths under age 15.

“Taiwan is heading the way of Japan, whose population is shrinking,” said Tim Condon, chief Asia economist at ING Groep NV in Singapore, who previously worked at the World Bank. “Taiwan’s stock market resembles Japan’s Nikkei in that both have been in a bear market since asset bubbles burst in 1990.”

Japan has struggled to overcome an aging and declining population, leading to two decades of depressed economic growth. The Nikkei 225 stock index is down 78 percent, the most in the world, since a peak in December 1989. Taiwan’s Taiex (TWSE) index is down 26 percent in the period, the third-worst performance.

Ma, 61, has put in place a monthly childcare stipend of NT$2,500 ($83) for newborns, payable to certain households earning an annual net income below NT$1.13 million until the child is two, to try and turn the birth rate around.

Property Risk
During the election, neither he nor Tsai of the Democratic Progressive Party recommended greater immigration to boost the population. The CEPD has said Taiwan has the world’s second- densest population among territories with more than 10 million people, limiting political scope for such a policy.

Aging raises the risk of substantial future home-price falls, said Laura Ho, an economist at Grand Cathay Services Corp. in Taipei. Property prices “are disproportionately high” and “older people are investing in property they won’t be able to find buyers for in years to come,” she said.

The president has vowed to consider imposing new taxes to rein in property costs. Housing prices in Taipei have more than doubled since 2000 and reached a record last year.

“Young people are discouraged from getting married because they can’t afford to buy a home,” Tamkang’s Chuang said.

Costly real estate and stagnant wages combined with the risk of recession to stir voter discontent. Gross domestic product fell 0.15 percent in the third quarter from the previous three months, as Europe’s fiscal crisis damped the export-led island’s overseas sales.

Stagnating Wages
Household income adjusted for inflation was lower in 2010 than in 2000. Joblessness, at 4.3 percent, compares with less than 2 percent three decades ago.

Ma says detente with former civil-war foe China, the island’s largest trading partner, will help bolster Taiwan’s $430 billion economy. He has relaxed trade, tourism and investment restrictions. Tsai argued his policy risks giving China too much sway over Taiwan.

Another consequence of closer economic ties to China has been an exodus of factories to the lower-cost mainland, crimping job opportunities at home.

Taipei-based Foxconn Technology Group (FOXCGZ), which assembles Apple Inc. iPhones and iPads, employs more than 1 million workers at its Chinese factories, compared with 10,000 in Taiwan. About 800,000 Taiwanese live in China, according to Taiwan’s Mainland Affairs Council.

Pace of Detente
In his victory speech, Ma said he will “control” the pace of rapprochement with Asia’s largest economy to ensure the policy retains public support. He took 51.6 percent of the vote in last week’s election, compared with Tsai’s 45.6 percent.

“Rapid ageing means declining labor input and, in the long term, suggests population will fall, which will slow the economy,” said Ma Tieying, an economist at DBS Bank in Singapore. “The savings rate will drop too, as older people usually have to spend their savings. That will be negative for investment.”

Taiwan’s predicament echoes a trend across Asia, signaling increased regional pension and healthcare burdens. Asia will account for 62 percent of the global elderly population by 2050, up from 44 percent in 1950, the Asian Development Bank said in a 2009 report.

While 2012, the year of the dragon, may boost Taiwan’s birth rate temporarily as it’s considered an auspicious period, population decline is inevitable, according to the CEPD.

“The economy isn’t in good shape,” Tamkang’s Chuang said. “But you need to have a stable income and feel secure about your job to have children.”