Apple, not China, is Taiwan’s biggest risk

For investors in Taiwan’s $841bn (€745.5bn) stock market, Tim Cook matters more than president Tsai Ing-wen.

Apple, not China, is Taiwan’s biggest risk

While the ascension of independence-leaning Ms Tsai to the presidency today has sparked concern relations with China will deteriorate, JP Morgan Asset Management and BlackRock say the bigger risk is the slowdown in the global smartphone business.

Apple reported its first quarterly sales decline in 13 years, with chief executive officer Mr Cook acknowledging on April 26 that - nine years after the iPhone’s game-changing debut -- the market had “stopped growing.”

That’s bad news for the island’s largest companies, which help build the devices. Taiwan Semiconductor Manufacturing and Hon Hai Precision Industry both reported falling profit last quarter.

Exports account for about two-thirds of Taiwan’s economy, with electrical equipment and machinery comprising half of all outbound shipments.

President Tsai, who succeeds Ma Ying-jeou today after winning elections in January, has shown no sign she will accept the principle that the island and China are both part of “one China”- an understanding that’s underpinned eight years of improving ties across the Taiwan Strait.

Foreign investors pulled a net $2.2bn from Taiwan’s shares this quarter. The outflows are a reverse of March, when overseas funds pumped $5bn into the island’s stock market, the most since 2007.

Stocks rallied as Apple’s biggest monthly gain in almost three years lifted confidence in its suppliers and the victory by Ms Tsai, whose Democratic Progressive Party won its first legislative majority, failed to trigger a significantly negative reaction from China.

Falling profits at the island’s technology companies are now weighing on the Taiex Index. Hon Hai’s earnings slid 9.2%.

Pegatron, which assembles iPhones, missed profit expectations and said April sales dived 16%.

TSMC, one of the largest manufacturers of the application processors that are a mobile device’s brains - cut its 2016 smartphone demand forecast in April. Its major customers include Apple, Qualcomm and HTC.

At the same time, Taiwanese firms such as Acer and Compal Electronics are still struggling to rebound from the downturn in personal computers, another key export for the island.

The technology industry’s failure to develop new must-have products is darkening the outlook for Taiwan companies, said Andrew Swan, head of Asian equities at BlackRock, who is underweight on the island’s shares.

“Now that smartphones are fairly well saturated, technological breakthroughs haven’t been keeping up to pace. That process has destroyed profitability for the sector,” Mr Swan said.

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