The economies of export-reliant South Korea and Taiwan are suffering as global growth cools. Yet foreign investors have been snapping up their stocks on the hunch that China, Europe or the United States will respond with major economic stimulus measures.
It's hard to be optimistic about the short-term economic prospects of either South Korea or Taiwan. In South Korea, exports are shrinking, industrial production is slowing and the GDP growth rate has cooled to 2.4 per cent. In Taiwan, all three indicators are negative. For both, weak exports are to blame: Shipments abroad are equivalent to nearly 60 per cent of South Korea's GDP and 68 per cent of Taiwan's.
So it may seem odd that foreign investors, after two months of selling, have regained their appetite for South Korean and Taiwan stocks. In the past month, they've bought at least $5-billion (U.S.) in South Korean equities, the fastest pace since mid-February. They've purchased $2.8-billion in smaller Taiwan, the most since mid-2011.
Their hope is policy-makers will give the stocks some artificial life support. Weak economic conditions increase the likelihood that Seoul and Taipei cut interest rates and boost government spending, supporting local demand. But even more important in economies so reliant on exports is stimulus in their biggest markets. The European Central Bank could pump more cash into supporting heavily indebted governments or the U.S. Federal Reserve could resume printing money to support a sluggish U.S. recovery. Either could revive demand for Asian exports – and would provide more cheap investment cash that might support Asian markets.
But China is the biggest market for both South Korea and Taiwan. Slowing growth in the Middle Kingdom could prompt Beijing to cut rates further or boost spending. If it does, South Korean and Taiwan stocks will seem cheap now. South Korean stocks are trading at roughly 8.8 times estimated earnings, their lowest since 2007. Taiwan's stocks are more expensive at roughly 14 times, but offer an average dividend yield of 3.5 per cent. For investors confident in central banks' sympathetic tendencies, the global economy's pain may prove to be their gain.