Taiwan elections have markets on edge

HONG KONG (MarketWatch) � Taiwan�s too-close-to-call election this weekend could be a rewarding one for investors who gauge the market correctly.

Citi analyst Peter Kurtz said in a research note earlier this week that the island�s smaller-capitalized stocks, which have been poor performers of late, could benefit in the event of a victory by the ruling Kuomintang party.

The small-cap stocks have performed poorly because of declining volume and a risk-adverse mood among investors over the last two years, with the segment trailing the main Taiwan stock index, the Taiex, by 17% in 2011 and 12% in 2010.

Reuters Taiwan's President Ma Ying-jeou at a campaign rally.

Taiwanese equities in general have underperformed regional Asian markets by 9% over the past three months, according to Credit Suisse research released earlier this month.

The weakness set in around the time polls indicated a narrowing gap between President Ma Ying-jeou and rival candidate Tsai Ing-wen, resulting in a drop in market turnover as investors moved to the sidelines, the investment bank said.

In the final polling allowed before a pre-election ban on voter surveys, Ma was ahead of Tsai by three percentage points, equivalent to the margin of error, according to Agence France-Presse.

Many analysts view a victory by the Ma�s Kuomintang (KMT), seen as more open to economic and other ties with mainland China, as more positive for the equity market than a victory by Tsai�s opposition Democratic Progressive Party (DPP).

Reuters Taiwan's Democratic Progressive Party presidential candidate Tsai Ing-wen waves to her supporters.

Credit Suisse even described the election as �a risk� for the Taiwanese share market in its 2012 outlook, as fears of a deterioration in relations with Beijing, perceived as likely in the event a DPP victory, would weigh negatively on retail investors� mood.

Weakness in Taiwan shares in the months leading up to Saturday�s election was the market�s way of discounting an �adverse� outcome, the investment bank said, adding that shares would likely rise �if the election result is a status quo� win for Ma�s KMT.

Nomura also viewed a KMT victory as economically beneficial, saying it would bolster relations between Taipei and Beijing, even helping speed up a fiscal stimulus package seen as necessary at a time when Taiwan�s economy is forecast to contract modestly in the first quarter on an annual basis.

Citi�s Kurtz didn�t offer any forecasts on how the small caps, dominated by retail and industrial companies, would perform in the event of Ma�s reelection, saying that any gains were unlikely to be significant in 2012. But he did hint at better things to come.

Click to Play China looms over Taiwan vote

Campaigning goes into high gear for Taiwan's presidential election, with China relations weighing heavily on this week's vote.

If past performance is any guide, a second term for Ma and the KMT should spark a modest rise in Taiwan�s small caps, followed by a pause lasting up to a few months, then further gains in 2013, Kurtz said.

Small stocks rose during the five months that followed the KMT�s 2008 victory over incumbent president Chen Shui-bian of the DPP.

The gains ran out of steam around the middle of that year, but an even larger advance was seen in 2009 as Taiwanese retail investors took an interest.