Not so much liquid, more of a downpour

VIEW FROM: TAIPEI

Taiwan's stockmarket prides itself on being the world's most liquid market. This is a polite euphemism for describing the market as highly volatile, or, to put it another way, crazy. Stockbrokers' dealing rooms are like bookmaker's shops, the difference is that there are more women in attendance, many dragging along reluctant children who shuffle impatiently as their mothers sit transfixed watching the monitors clicking up share price changes.

Taiwanese stock market investors can justifiably be called punters, since they are in the market to gamble. Concepts such as gearing ratios, price earnings ratios and the like, mean nothing to them. "I can read the newspapers in the morning, see if there is some political or other event likely to move the market and be pretty sure how prices will move during the day. It really is that simple," says a broker in one of Taipei's largest local companies.

Astonishingly 93 per cent of the market is owned by private investors, slightly down from 96 per cent a couple of years ago. Institutional activity is marginal and also highly speculative but influential.

One broker working for a European company says that local investors avidly read the lists of transactions published daily by foreign institutions and take their lead from what these institutions are doing.

However Andy Cheng, the President of Kwang Hua Securities, points out that the foreign investors also see Taiwan as "an in and out market". He explains: "They like its volatility, being global. They can set aside, say two or three per cent of their portfolio, for more speculative activity and so they choose Taiwan as a home for this money." The Taiwan government would like to see more foreign institutional money come into the country.

Limits on the amount of foreign investment are slowly being raised. This month foreigners were allowed to hold 15 per cent of a company's equity, up from 12 per cent, and most observers see the next threshold as being 17 per cent. Further reforms are on the way, contained in a bill on foreign investment making its way through the legislature. However, the reforms come at a less than fortuitous moment for the stock market.

Political uncertainty, caused by China's missile testing in the Straits of Taiwan last month, sent the market into a downward spiral, at one point recording a 40 per cent fall from the beginning of the year. There has been a modest recovery, but the market remains in the doldrums, sticking at about 35 per cent below the new year level. One broker in Taipei believes that only a third of the market fall can be attributed to political factors. Andy Cheng is also sanguine about the political situation. "In Taiwan we have so much experience of turmoil," he says.

Clearly there are other factors that were leading the price of shares downwards. For a start, the market was getting too hot last year. At its peak, shares were trading on an average price earnings ratio of up to 50 times, settling down at around 30 times.

Some sectors, particularly electronics, stayed robust, but even a cursory examination of gearing levels (the proportion of loans relative to assets) in the construction and property development sector should have started alarm bells ringing. Average gearing stood at about 127 per cent, which compares with a 44 per cent in the booming electronics sector.

Moreover, deposit rates in the banks are starting to look far more attractive these days, so there is every incentive to sit on the sidelines while the market sorts itself out. However, the situation in the banks themselves is far from happy. Last week there were scenes of panic reminiscent of the recent run on Japan's Cosmo Credit Corp.

The Taoyuan County Chungli Association credit union was under siege from investors wanting to withdraw their money because, like Cosmo, it had relied on a buoyant property market to help ride out a bad loan crisis.

The problem in Taiwan is that there have been two bank runs in the past two months. The first, involving the Changhua Fourth Co-operative Bank, was bigger. What worries the financial sector, and the government, when it finally acknowledges the scope of the problem, is that the two bank runs may be no more than the tip of the iceberg.

At the Taoyuan credit union there are signs of irregularities which have led to the detention of its chairman, but even without malpractice, both banks and credit unions are suffering from the sharp fall in property prices, following the bonanza years of 1991 to 1994.

Some say the financial institutions over-extended themselves recklessly. In 1992, for example, the banks increased property lending by 90 per cent. Although property prices remain in the outer stratosphere, with the total market value of land being equivalent to 11.1 times of gross national product , compared with 90 per cent of GNP in the United States, the market trend is firmly downwards.

The reported level of non-performing bank loans has now reached 2.5 per cent of banks' total loan portfolio, up from from 1.5 per cent last year - and there are fears that this figure may not yet have caught up with a stack of property loans that are about to turn sour.

A straw in the wind is that overdue loans now constitute 4.9 per cent of the major banks' total loan portfolio, compared with 1.8 per cent a year ago. With banks accounting for some 40 per cent of the Taipei stock market's total capitalisation, it is hardly surprising that the market is not looking too bright.

As ever when the going gets tough, stockbrokers start talking about fundamentals. The story they have to tell is of an undervalued market, now trading on an average price earnings ratio of some 17 times, with earnings growth this year expected to reach between 23 per cent and 25 per cent, compared with an average 41 per cent growth last year.

It sounds good and the Taiwan market really does look pretty cheap at the moment but for those with short memories it is worth remembering that this is the market that plunged some 80 per cent in 1980, from an index high of 12,682 points to 2,485.

The market today stands a shade below 5,000 points. This is less than half the level reached five years ago.