TAIWAN UP 13% IN JANUARY - WHAT'S BEHIND THIS EXCEPTIONAL PERFORMANCE?

The Capricorn, or January, effect which boosted stock prices in past years, gave most Asian bourses a miss last month.

But Taiwanese stocks were the exception. Taiwan's benchmark index posted a sterling performance last month. It soared 13 per cent, making it the best performing bourse in Asia.

What's behind the exceptional performance of the Taiwanese bourse? Ms Janice Lim, fund manager for the Savers Taiwan Fund, said that the strong return was driven primarily by old economy cyclical sectors such as steel, cement and textiles.

China-related stocks also did well, with the approval by the Taiwanese Legislative Yuan of a five-year tax exemption for new investments by manufacturers and related service sector companies.

Politics could also have played a part in last month's stock market rally. Although China and Taiwan have been at logger heads for many years, cross-straits relations appear to be headed for some improvement. Progress on direct links took a step forward last month when a Taiwanese commercial flight flew to and from China for the first time since civil war ended in 1949.

In yet another first, the world's largest foundry, Taiwan Semiconductor Manufacturing Company, received in principle approval last month from the Taiwan government for it to build a US$900 million plant in Shanghai. This is the first time that the government has given the green light for a major Taiwanese semiconductor player to invest in China.

According to Ms Ho Hsiu-Mei, Senior Portfolio Manager at First State Investments, Taiwanese companies represent a good proxy to the China growth story. China stands out as one of the fastest growing economies in the world and Taiwanese manufacturers, which have built their presence in China in the early 1990s, are enjoying good returns on their investments.

But having risen by 13% this year, the immediate upside for the Taiwanese bourse may be limited. In a Dow Jones poll last December, analysts had forecasted that the benchmark index of the Taiwan Stock Exchange would end the first quarter of this year at 5,186 compared to about 5,000 currently.

Mr Robin Parbrook, a Director at Schroder Investment Management, views the recent rally in the domestic sectors as overdone. According to him, most stocks in the material and financial sectors are trading well above fair value based on company fundamentals. But Mr Parbrook sees selective opportunities in the Taiwanese tech sector, which has underperformed the market. He says that further weakness in this area could present buying opportunities.

PERFORMANCE OF MAJOR ASIAN BOURSES

	% Chg*
Taiwan	12.6%
Thailand	3.8%
Philippines	3.8%
Malaysia	2.9%
Japan	-2.8%
Singapore	-3.7%
India	-3.8%
South Korea	-5.7%
Indonesia	-8.6%

* from end-Dec 2002 to end-Jan 2003
Source: Reuters