Apple-Inspired Rally in Taiwan Stocks Seen Faltering on Earnings

What Apple's New iPhone Screens Mean for Users, Suppliers
  • Taiex Index projected to rise 3% by year-end in Bloomberg poll
  • Newspaper report about iPhone 7 orders sent shares surging

The biggest rally in Taiwan stocks in eight months will peter out as slowing earnings and uncertainty over relations with China counter speculation about demand for Apple Inc.’s newest iPhone.

The benchmark Taiex Index will end the year at 8,650, or 3 percent higher than Thursday’s close, according to the median estimate of fund managers and analysts in a Bloomberg survey. The gauge surged 2.6 percent on Monday after the Economic Daily News reported Apple ordered as many as 78 million iPhone 7 units by the end of the year from the island’s companies, citing unidentified suppliers.

While the report helped lift shares of Taiwan Semiconductor Manufacturing Co. and Hon Hai Precision Industry Co., the nation’s two largest companies, Uni-President Asset Management Corp. says sales for Apple’s latest smartphone will likely be muted and investors need to be wary of the possibility of worsening ties with China after President Tsai Ing-wen’s inauguration last week.

“There are no high expectations for total sales volume of the iPhone 7,” said Ben Lin, a fund manager at Uni-President in Taipei. “A big risk is whether China will take any actions in response to Tsai’s cross-strait policy.”

Monday’s gains came amid a rocky ride for the nation’s stocks. Foreign investors have pulled a net $2.1 billion from Taiwan equities this quarter, the most among eight Asian markets tracked by Bloomberg, as Apple reported its first-quarter sales drop in 13 years. The Taiex Index climbed 0.8 percent to 8,463.61 at the close on Friday, capping a weekly advance of 4.1 percent.

Tsai’s reluctance to endorse the one-nation principle with China appears to have irked the Communist Party, with the official Xinhua News Agency saying this week the island’s first female president is “emotional” and “extreme” because she isn’t married.

With smartphone sales slowing globally, five out of six respondents expect earnings by listed companies to drop this year. The Taiex’s one-year forward earnings have declined 5.2 percent so far this year, while the economy has also contracted on a yearly basis over the last three quarters. Exports account for about two-thirds of Taiwan’s gross domestic product, with electrical equipment and machinery comprising half of all outbound shipments.

There are signs companies are finding ways to innovate. HTC Corp. has surged 30 percent this week after Goldman Sachs Group Inc. recommended buying the shares on expectations the struggling smartphone maker will succeed in having a leading virtual reality platform in the next few years.

Dollar Assets

Still, concern about U.S. interest rates will cap gains, according to Anderson Chien, vice-president at Cathay Futures in Taipei. Traders are currently pricing in a 34 percent chance that the Federal Reserve will raise borrowing costs next month, up from 4 percent two weeks ago. Higher interest rates make dollar assets more attractive than emerging-market securities.

“The market will still be fine in the first half but not so good in the second half, mainly because of the chance the Fed will raise rates,” Chien said. “There’s no light at the end of the tunnel for the economy yet.”

The participants in the Bloomberg survey included Capital Investment Management Corp., Cathay Futures, Fubon Securities Investment Services, IBTS Investment Consulting Co., Sunrise Brokers (Hong Kong) Ltd., Taishin Securities Investment Trust Co., Uni-President Asset Management Corp. and Yuanta Securities Investment Trust Co.

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