A rally in Taiwan’s bank stocks over the past week may be more hype than reality because optimism that financial companies will draw investments from China may not materialize, Credit Suisse Group said.
Only one or two of 38 banks in the nation are likely to become “strategic acquisition targets,” Credit Suisse analyst Ernest Fong wrote in a report yesterday. Investors should be “underweight” in financial companies and buy Taiwanese technology shares instead, the analyst added.
“We cannot see any economic rationale for Chinese banks to be interested in their Taiwan peers when returns are significantly inferior,” Fong wrote. “Nor can we be confident that any improvements to the economy or gaining access to the China market would have an immediate impact on banks.”
The benchmark TAIEX index has surged 17 percent since Taiwan last week permitted Chinese investments for the first time in six decades. A measure of financial companies on the index rose 30 percent in the five days through yesterday, the third-biggest gain among 28 industry groups.
The 43 percent advance in the TAIEX this year has made the benchmark index the third-best performer among 90 global measures tracked by Bloomberg.
Shares could still rise further amid “positive” earnings momentum and as improving ties with China reduces Taiwan’s so-called risk premium, Credit Suisse said. The brokerage raised its forecast for the TAIEX index to 7,300, 11 percent higher than yesterday’s closing level, from an earlier estimate of 5,800.
Goldman, Sachs & Co on May 3 upgraded its view on Taiwan’s equities to “overweight” from “underweight” and increased its year-end forecast for the TAIEX to between 7,500 and 9,000. BNP Paribas yesterday raised its forecast to 7,800, citing the improving ties with China.
Following the rally, Taiwanese stocks are trading at a 64 percent premium to the rest of the region, based on a model comparing price-to-book value to return on equity, Credit Suisse also said.
That is near the 65 percent premium attained by Hong Kong-listed Chinese companies in October 2007, when China’s State Administration of Foreign Exchange said it would enable individuals to buy Hong Kong stocks for the first time in a pilot program known as “through train,” the report said.
Short-selling Taiwan stocks may be among one of the “best trades” in the next few months as the optimism over easing ties with China drive prices higher, Ashutosh Sinha, managing partner of Singapore-based hedge fund Amoeba Capital Partners, said at the Bank of America-Merrill Lynch conference yesterday.
So-called short sellers borrow securities and sell them on hopes of capturing a profit by replacing them after prices fall.
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