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Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly e-newsletter.
If solely Taiwanese buyers had paid nearer consideration to the cheesiest of financial statistics, the Huge Mac Index.
Earlier this yr in its semi-annual calculation of the BMI, The Economist ranked the Taiwan greenback as the most affordable of the 58 currencies in its purview, being undervalued by 58.8 per cent towards the dollar. Whereas this divergence has steadily risen lately, it has been whopping (sorry) for the previous decade.
Relatively than see this as a warning signal, Taiwanese buyers gorged on abroad belongings, on the blithe expectation that the authorities would be capable of hold the native foreign money low cost. Whoops. Alphaville has already lined the predicament that the Taiwan life insurance coverage business now finds itself in, however a military of mother and pop buyers at the moment are additionally nursing some painful foreign money losses, due to the Taiwanese greenback’s bounce.
That is largely due to a peculiar homegrown ETF business — one of many greatest on this planet relative to the dimensions of the nation. The $196bn held by its ETFs account for 66 per cent of complete funding fund belongings on the finish of 2024, based on State Avenue information.
That equates to virtually $8,400 on common for each individual on Taiwan. And, for quirky causes, bond ETFs make up a giant chunk of Taiwanese ETF business.
Again in 2018, the Taiwanese regulators tried to damp the booming issuance of “Formosa bonds”, dollar-denominated bonds issued by abroad debtors in Taiwan to Taiwanese buyers. However to get round a cap on Formosa bond possession, the native funding business as a substitute nurtured an ecosystem of “Formosa ETFs”, which have been locally-listed automobiles that in flip purchased greenback bonds. Since these technically counted as native equities, they averted the cap, even when the underlying securities have been nonetheless largely US bonds.
Quickly sufficient, this unfold from Taiwan’s institutional buyers to native retail buyers, eager on the upper rates of interest that even high-grade US Treasuries and company bonds supplied.
Between 2019 and January of this yr, Taiwanese buyers pumped $73bn into US bond ETFs, based on Morningstar, largely into funds concentrating on Treasuries with maturities of 20 years-plus, but in addition into longer-dated company bonds. To place this into perspective, the complete Taiwanese fastened earnings ETF sector — together with these funds investing domestically — was solely price $94bn on the finish of March, based on Morningstar.
Taiwanese buyers are not lovin’ it, although (sorry, final one, promise). They began pulling cash out in February and March, when about $1.1bn was withdrawn. Morningstar to date solely has April information for one in eight Taiwanese bond ETFs, however these alone noticed $1.1bn of web outflows, indicating that the withdrawals have been accelerating even earlier than the Taiwanese greenback went on a rollercoaster in Might.
We don’t but know the general toll for this month, however Ryan Chang, head of the funding division at CTBC Investments, certainly one of Taiwan’s main fund homes, estimates out that between the losses suffered by US bonds in nominal phrases and the foreign money losses from the Taiwanese greenback’s appreciation, the typical Taiwan investor swallowed a roughly 11-12 per cent loss already in Might.
The most important and oldest sector ETF — the Yuanta US Treasury 20+ 12 months Bond ETF — is an effective instance of the hit Taiwanese buyers have taken. It has misplaced 13 per cent of its worth for the reason that starting of April, most of it from the foreign money transfer.
However in the event you issue within the losses on the underlying bonds for the reason that Federal Reserve began jacking up rates of interest, and it has now virtually a 3rd underwater since its beginning in early 2017.
Unsurprisingly, outflows at the moment are accelerating. Internet redemptions hit $817mn in April, up from $504mn in March and $192mn in February.
We don’t have complete movement information for Might but, however its complete belongings presently stand at $7.8bn, down from a peak of $9.4bn on the finish of April.
With the mixed belongings of Taiwanese US bond ETFs nonetheless 10 occasions their measurement at the beginning of 2019 — regardless of the latest losses and redemptions — there’s nonetheless some huge cash at play.
Any additional loss in urge for food may show to be removed from a nothingburger (OK we lied. However we remorse nothing).
