HSBC On TWD Underperformance In 2024 To Date

The bank weighs in on TWD underperformance in 2024 to date, noting strong local investor outflows have offset the positive equity flow backdrop from overseas investors. See below for more details:

• HSBC: "The TWD has depreciated by 3.3% against the USD year-to-date and is an underperformer in the region alongside other low-yielders such as THB and KRW. This is despite Taiwan's equity market's outperformance. Foreigners made about USD7.7bn worth of net equity inflows so far this year.
  
  An equity market rally is not entirely a surprise after the election passed without any incident and as the AI theme continues to gain more traction. Foreigners' ownership now accounts for 39.8% in TAIEX, the highest level since April 2022, albeit still lower than its all-time high of 44.6% reached in January 2021.
  
  This divergence between the TWD and local equity performance stands in contrast with our regression analysis, which suggests that local equity performance and foreigners' equity inflows tend to be the most important drivers of USD-TWD in recent years. Indeed, that correlation held at the end of 2023, when there were USD13.7bn of equity inflows in November and December and a 5.6% drop in USD-TWD.
  
  Why did the TWD fail to benefit from equity inflows so far in 2024? Just as global risk appetite improved and foreigners bought Taiwanese stocks, residents' enthusiasm for overseas investment has simultaneously picked up. This is reflected in a sharp increase of locals' purchase of overseas cash bonds and of ETFs tracking foreign bonds. As a hawkish repricing of Fed rate cuts this year led to a rebound in US government yields, the yield premium offered by 10-year US treasuries over similar bonds in Taiwan re-widened towards record high levels last seen in November 2023. Bloomberg's data on fund flows suggests that locals invested USD3.9bn into bond ETFs in January, the largest monthly amount on record. That was followed by another USD3.2bn in February. Locals' investment in overseas cash bonds followed a similar pattern, reaching USD2.5bn in January, according to data released by Taiwan Securities Association. Altogether, outbound bond investment reached USD6.5bn in January."