Taiwan stock index may rise 15%, Morgan Stanley says

The TAIEX Index may climb to 8,500 in 2010 as technology earnings, better interest margins at banks and possible cross- straits mergers and acquisitions boost growth, Morgan Stanley analysts Jesse Wang and Angel Lin said in a report dated Oct. 2. The brokerage previously forecast 7,700 for the gauge by end- 2009.

“Cross-straits politics will continue to be an ongoing theme that could provide investors with surprises,” the analysts said.

The TAIEX surged the most in eight years on April 30 as the island allowed Chinese investment for the first time since the end of a civil war in 1949. President Ma Ying-jeou has sought closer ties with the mainland since taking office last year, helping the stock gauge to add 62 percent in the first nine months of this year, double the MSCI Asia Pacific Index's 27 percent gain.

Taiwan, currently in a recession, is seeking a so-called economic cooperation framework agreement with China to allow cross-shareholdings of banks and insurers that is estimated to create 273,000 jobs and boost exports.

Morgan Stanley said it's optimistic about personal and notebook computer companies because their profits may rise on corporate replacement demand once Microsoft Corp. releases its new Windows 7 operating system. It also recommends handset component makers such as chipset and lens makers because of increasing volume growth.

The brokerage increased its stock weightings on Acer Inc., the world's third-largest personal computer vendor, and MediaTek Inc., Taiwan's biggest chip designer, rating both companies “overweight.”

Morgan Stanley favors private banks, saying they may have strategic flexibility in the mainland market once a financial memorandum of understanding with China is signed. Cathay Financial Holding Co., is rated “overweight” and may outperform as its life insurance unit, the largest in Taiwan, may boost earnings per share.

Morgan Stanley added Taiwan Glass Industrial Corp. to its model portfolio, rating the shares “overweight.” The Commercial Times reported on Sept. 17 that Taiwan Glass will spend US$485 million on a factory in China and the Economic Daily News said on Sept. 23 the company will invest NT$20 billion in energy-saving glass production.

“The company is China's second-largest energy-saving glassmaker and well positioned to benefit from robust growth,” the analysts said. “This is because China has vowed to cut greenhouse gas emissions by a notable margin by 2020 from the 2005 level.”

Morgan Stanley recommends China-related consumer shares such as Cheng Shin Rubber Industry Co., a Taiwanese tire manufacturer, and Giant Manufacturing Co., the world's largest branded bicycle maker, rating them “overweight” because of accelerating consumption among increasingly wealthy Chinese. Producers of bicycles, replacement tires and food should perform better because of reduced concern about over-capacity, according to the report.

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