China-Taiwan tensions shouldn't concern investors: Cathay Site's Andy Chang

Chang explains why Indian investors should consider investing in the Taiwanese market

Cathay Site, a leading asset manager in Taiwan, has launched India’s first Taiwanese equity fund in partnership with Nippon India. In an interview with Samie Modak, Andy Chang, president and CEO, Cathay Site, explains why Indian investors should consider investing in the Taiwanese market. Edited excerpts:

Many foreign brokerages are  currently underweight on Taiwan…

Taiwan's economy will grow by 5.88 per cent in 2021. We are optimistic that Taiwan’s economy will reverse the pre-pandemic downward trend in the new era of technology, bolstered by the gradual shifts in the world’s industrial supply chains in view of the US-China trade dispute and rising cost in China. Due to extraordinary demand and pricing conditions, Taiwan corporate earnings look very strong and attractive.

How’s the semiconductor shortage impacting stock market performance? 

Demand for chips is exceeding supply; the production of many automobile manufacturers and consumer electronics companies across the world will be affected. Though the semiconductor shortage appears to be a challenge, it brings in an opportunity. Many tech companies have begun developing their own chips, and the PHLX Semiconductor index year-to-date is up over 38 per cent.

Is there a concentration risk in investing in Taiwanese equities with semiconductor/ tech stocks dominating? 

The Taiwan semiconductor industry is well recognised as the most rounded and mature semiconductor supply chain in the world. Due to high costs and strategic concerns, the success of the Taiwan semiconductor industry is hard to be replicated. Therefore, we do not see this as a threat to the industry but more dependency on the best quality Taiwan semiconductor products.

With the work-from-home (WFH) theme now having played out, will it lead to any underperformance? 

The WFH trend appears to be here to stay, even after the pandemic, as companies look to cut costs, access a larger base of talent, and give employees more flexibility. This should ensure that demand holds up in the long term and so we think these stocks remain a good long-term investment.

How does the Taiwan-China relationship impact the stock market?

The geopolitical situation in Taiwan is not a new development that investors need to be particularly concerned about. Taiwan’s economic importance to the entire world acts as a shield against any confrontation. In the past, as is the recent experience, we have witnessed that markets had not been much impacted by news around geopolitical situations.

What are the advantages of investing in the Taiwanese market for an Indian/overseas investor?

Taiwan is a global play on the semiconductor & electronics industry, with exports to the entire world, including China, Asean, and developed markets like the US, Europe and Japan. Semiconductors are the brains of modern electronics. They enable technologies of the future, such as artificial intelligence, quantum computing, and advanced wireless networks. By investing in Taiwan, investors get to participate in profit pools not available in India. Investors also get to benefit from diversification due to weak correlation between the Indian and Taiwanese markets (both stock market and currency)

Do Taiwanese retail investors invest in India? How do they go about it?

India has become a very important country in Asia. Along with optimistic economic prospects and policy support, Taiwanese investors have been increasing their interest in India. For Taiwanese investors, the best way to invest in India is through mutual funds, and the investment amount around $1.2 billion.

What’s your outlook for the Indian markets? There are concerns around high valuations. What is your view?

India is a fast-growing emerging market, offering a diversified profile with good exposure to financials, IT services, consumer segments, oil & gas, and new-age tech companies. With the Indian government and the central bank having a pro-growth approach, taking several measures to boost high-growth, such as corporate tax rate cut, production-linked incentive (PLI) schemes to boost manufacturing, and tolerance to a higher fiscal deficit for growth stimulus, India offers good investment opportunity.

What’s the mutual fund penetration in Taiwan? How does the industry compare with the Indian MF industry? 

According to SITCA, the assets under management (AUM) of the onshore and offshore mutual funds are $320 billion in August 2021. The 2020 GDP of Taiwan was $710 billion. As the result, the mutual fund penetration in Taiwan is 45 per cent.

What are your views on capping the weight of a sector or a stock in an index? 

The rationale behind a capped index is to prevent any single security from exerting a disproportionate influence on an index. Putting a cap in place restricts this influence. One disadvantage of a cap-weighted index is that it does not always accurately reflect the way markets actual behave.

Are passive funds more popular than active funds in Taiwan?

For the past few years, the development of passive funds has been faster than active funds. A key reason is: Young investors are more willing to accept new investment ideas. The number of new thematic exchange-traded funds in Taiwan has jumped for the past few years, as fund managers try to capture young investors’ interest.