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Taiwan’s proposed capital-gains tax on stock trading would cut trading volumes and valuations, making stocks such as Hon Hai Precision Industry Co. (2317) cheaper, the manager of the Taishin (TAIMAST) Mainstream Fund said.
Taishin will purchase more shares of Apple Inc. (AAPL) supplier Hon Hai if the stock falls below NT$100 ($3.39), Taishin Securities Investment Trust Co.’s Alex Lu, said by phone on April 18. His NT$500 million fund has outperformed this year 671 other funds that are domiciled in Taiwan. Hon Hai, the Taishin fund’s top holding, rallied 25 percent in 2012 to NT$102, more than the benchmark Taiex Index's 6 percent gain. The stock surged 3.6 percent, the most since March 28, to NT$103.50 today.
The Taiex has fallen 6.7 percent since the Economic Daily News reported on March 29 that the government was considering the levy, compared with the MSCI Emerging Markets Index’s 3.4 percent decline. The Taiwanese gauge is valued at 14.4 times estimated profit, down from 15 times on March 29. It’s still at a 38 percent premium to the MSCI Emerging-Markets Index (MXEF)’s multiple of 10.4, according to data compiled by Bloomberg.
“The tax proposal will reduce volume in the market and subsequently cut the valuations,” said Lu. “That would give investors opportunities to enter the market.”
Individual investors who earn more than NT$3 million annually from trading stocks, futures, and options will incur a 20 percent tax from next year, Finance Minister Christina Liu told reporters on April 12 after her ministry proposed the duty to Cabinet. Local institutional investors who earn in excess of NT$500,000 will face a 12 percent levy, while overseas investors without offices and direct business operations in Taiwan will be exempt, she said.
The Cabinet has yet to give a timeline for the tax proposal’s implementation. The Ministry of Finance is aiming for the tax to take effect from 2013, meaning taxpayers making gains from trading next year will pay the tax in May 2014.
The Taiex (TWSE) climbed 1.6 percent on April 13, the day after the tax was proposed by Liu’s ministry to Cabinet. The negative impact has been reflected in stock prices and the overall reduction to earnings at companies besides financial services should be less than 2 percent, according to an April 12 report from Credit Suisse Group AG. The Taiex has declined 3.7 percent since then.
There is “no question” the tax is negative to the equity market, Kevin Chang, a strategist at Fubon Securities Co. wrote in a report on April 13. The jitters provide entry points because the tax’s impact would be limited in the long run, he wrote. He predicts a support level of about 7,400 for the Taiex, which closed at 7,498.84 today.
The Taiex slid 21 percent last year and has risen in 2012 on signs of a recovery in the U.S. economy and speculation Ma Ying-jeou’s re-election as president will lead to stronger economic ties with China.
Taishin would buy more shares of Hon Hai, the world’s largest contract manufacturer of electronics, if the stock declined because the company will earn more profits from Apple sales, Lu said.
Hon Hai posted a record quarterly profit in the October-to- December period as sales of Apple’s iPhones and iPads climbed. Apple, which outsources its iPad assembly, most of its iPhones and some of its MacBooks to Foxconn Technology Group, Hon Hai’s parent, posted record revenue for the three months ended Dec. 31 with 15.4 million iPads sold, exceeding analyst estimates for 13.5 million units.
“Apple is returning more margins to its suppliers and Hon Hai is set to benefit more than the others,” said Lu.
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