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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
If only Taiwanese investors had paid closer attention to the cheesiest of economic statistics, the Big Mac Index.
Earlier this year in its semi-annual calculation of the BMI, The Economist ranked the Taiwan dollar as the cheapest of the 58 currencies in its purview, being undervalued by 58.8 per cent against the greenback. While this divergence has steadily risen in recent years, it has been whopping (sorry) for the past decade.
Rather than see this as a warning sign, Taiwanese investors gorged on overseas assets, on the blithe expectation that the authorities would be able to keep the local currency cheap. Whoops. Alphaville has already covered the predicament that the Taiwan life insurance industry now finds itself in, but an army of mom and pop investors are now also nursing some painful currency losses, thanks to the Taiwanese dollar’s jump.
This is mostly because of a peculiar homegrown ETF industry — one of the biggest in the world relative to the size of the country. The $196bn held by its ETFs account for 66 per cent of total investment fund assets at the end of 2024, according to State Street data.
That equates to almost $8,400 on average for every person on Taiwan. And, for quirky reasons, bond ETFs make up a big chunk of Taiwanese ETF industry.
Back in 2018, the Taiwanese regulators attempted to damp the booming issuance of “Formosa bonds”, dollar-denominated bonds issued by overseas borrowers in Taiwan to Taiwanese investors. But to get around a cap on Formosa bond ownership, the local investment industry instead nurtured an ecosystem of “Formosa ETFs”, which were locally-listed vehicles that in turn bought dollar bonds. Since these technically counted as local equities, they avoided the cap, even if the underlying securities were still mostly US bonds.
Soon enough, this spread from Taiwan’s institutional investors to local retail investors, keen on the higher interest rates that even high-grade US Treasuries and corporate bonds offered.
Between 2019 and January of this year, Taiwanese investors pumped $73bn into US bond ETFs, according to Morningstar, mostly into funds targeting Treasuries with maturities of 20 years-plus, but also into longer-dated corporate bonds. To put this into perspective, the entire Taiwanese fixed income ETF sector — including those funds investing domestically — was only worth $94bn at the end of March, according to Morningstar.
Taiwanese investors are no longer lovin’ it, though (sorry, last one, promise). They started pulling money out in February and March, when about $1.1bn was withdrawn. Morningstar so far only has April data for one in eight Taiwanese bond ETFs, but these alone saw $1.1bn of net outflows, indicating that the withdrawals were accelerating even before the Taiwanese dollar went on a rollercoaster in May.
We don’t yet know the overall toll for this month, but Ryan Chang, head of the investment department at CTBC Investments, one of Taiwan’s leading fund houses, estimates out that between the losses suffered by US bonds in nominal terms and the currency losses from the Taiwanese dollar’s appreciation, the average Taiwan investor swallowed a roughly 11-12 per cent loss already in May.
The largest and oldest sector ETF — the Yuanta US Treasury 20+ Year Bond ETF — is a good example of the hit Taiwanese investors have taken. It has lost 13 per cent of its value since the beginning of April, most of it from the currency move.
But if you factor in the losses on the underlying bonds since the Federal Reserve started jacking up interest rates, and it has now almost a third underwater since its birth in early 2017.
Unsurprisingly, outflows are now accelerating. Net redemptions hit $817mn in April, up from $504mn in March and $192mn in February.
We don’t have comprehensive flow data for May yet, but its total assets currently stand at $7.8bn, down from a peak of $9.4bn at the end of April.
With the combined assets of Taiwanese US bond ETFs still 10 times their size at the start of 2019 — despite the recent losses and redemptions — there’s still a lot of money at play.
Any further loss in appetite could prove to be far from a nothingburger (OK we lied. But we regret nothing).
