Best Taiwan Fund Braces for Stocks Retreat After Rally

Taiwan’s best-performing equities fund is bracing for stock market declines over the next two months after the biggest foreign inflows in Asia this year sent the benchmark index to a seven-year high.

The Taiex index will probably fall about 300 points by the end of August, or 3.2 percent from yesterday’s close, before resuming its rally, said Shen Chien-hung, whose $51 million Taishin 2000 High Technology Equity Fund returned 28 percent this year. The fund will probably pare positions in some semiconductor makers while buying Apple Inc. suppliers after the market retreats, he said.

“We may sell some stocks which had gained too much, and some chip stocks, and replace them with Apple-related stocks,” said Shen, 42, whose fund posted this year’s biggest gain among 82 Taiwan peers tracked by Bloomberg with at least $50 million in assets. He favors shares of Largan Precision Co., MediaTek Inc. and Taiwan Semiconductor Manufacturing Co.

The Taiex has risen 10 percent this year, twice as much as the MSCI Emerging Markets Index, after Taiwan’s economy expanded at the fastest pace since 2012 in the first quarter and exports climbed for a fourth straight month in May. The rally has lifted valuations to the highest in 10 months and pushed the Taiex’s relative-strength index, a technical gauge indicating whether an asset is oversold, to levels that signal a pullback.

The benchmark index advanced 0.5 percent to 9,484.96 at the close, the highest level since November 2007, after capping a sixth-straight quarter of gains in the April-through-June period. Foreigners purchased $10.5 billion of the island’s shares this year, the most among eight Asian markets tracked by Bloomberg.

Still Underweight

The inflows have helped propel the Taiex’s valuation to 18 times reported earnings, the highest since September. The gauge’s 14-day relative strength index was 75.4 yesterday, above the 70 threshold that indicates to some analysts an asset is poised to fall.

Foreign investors still have room to boost their holdings in Taiwan, said Arnout van Rijn, the chief investment officer in Hong Kong for Robeco, which oversees about $289 billion worldwide. Investors surveyed by Bank of America Merrill Lynch last month had underweight positions in Taiwan even after boosting their holdings since May.

“They haven’t been buying enough to catch up with the benchmark,” van Rijn said in a June 26 interview. Robeco has a “small” overweight position in Taiwan, he said.

The island’s economy expanded 3.1 percent in the first three months of the year and the government last month raised its growth forecast for this year to 3 percent from February’s 2.8 percent.

Year-End Rally

The Taishin fund has gained an annualized 18 percent over the past three years, beating 94 percent of peers tracked by Bloomberg. Brogent Technologies Inc., Elite Advanced Laser Corp. and Soft-World International Corp., the fund’s three biggest holdings as of the end of March, have posted rallies ranging from 69 percent to 240 percent this year.

Taiwan’s stocks will probably fall over the next two months as investors sell shares after receiving dividends in July and then wait for new products from Apple, said Shen, who assumed the lead role managing the Taishin fund this month after his subordinate Li Sui-Jai resigned. He predicts the Taiex may rebound to 9,500 by the end of the year, a gain of 0.6 percent from yesterday’s close.

Li, 36, who left the company to be a fund manager at Transglobe Life Insurance Co., said in a phone interview today the Taiex may reach 10,000 this year.

‘Still Opportunities’

“There’s a high chance of that happening,” said Li, who managed the Taishin fund from November 2010 though the end of last month. “Taiwan stocks are not expensive. Investors are transferring money from property to the stock market. There are still opportunities. It’s not too late to enter.”

Li favored foundries, dynamic random-access memory stocks and Apple-related companies. The sale of Apple’s next generation iPhone in the fourth quarter will also fuel gains for stocks, Shen said. New Apple products, including a larger Iphone may boost suppliers’ second-half sales, Bloomberg Industries analyst Jitendra Waral said in a June 5 note.

After stocks retreat during the next few months, it will be “time to accumulate,” Shen said. “There will be another peak in the fourth quarter to first quarter next year.”

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