Welcome to Thoughts on the Market. I'm Jonathan Garner, Chief Asia and emerging markets

equity strategist for Morgan Stanley Research. Along with my colleagues bringing you their

perspectives, today I'll be talking about the path ahead for Taiwan Equities. It's Thursday,

September 9th, at 7.30 a.m. in Hong Kong. Taiwan Equities have been a standout in a generally

poor environment for Asia Equities this year. In fact, year to date, only India and Taiwan

have come close to keeping up with the performance of the S&P 500. But although we're staying overweight

India, we recently cut our recommendation on Taiwan from Equate to Underweight. So let's dive into

the confluence of factors behind this. First, equity valuations are high. The MSCI Taiwan index,

which comprises large and mid cap segments of the Taiwan equity market, is trading at the highest

valuation premium to overall emerging markets since the TMT.com bubble. Marketcapt GDP is as an

all-time high of 240 percent. For some perspective, the 20-year average is 137 percent.

This surge in valuations has been driven by a combination of a boom in retail investor trading

activity, which recently has been running at seven times the rate of early 2016, and also a very

strong cycle of tech spending. However, we see early signs that both these forces are starting to roll

over. Retail trading volume in August was down 34 percent on July, and in 2022, we expect a

market softening in demand for PCs, TV, and mobile handsets. Indeed, we expect PC demand to shrink

after two back-to-back years of double-digit growth. Second issue is that risks over the Delta

variant are rising. Although Taiwan outperformed last year in COVID management, vaccination performance

has lagged this year, with only around 7 percent of the population fully vaccinated currently on

our estimates. Thirdly, Taiwan geopolitical risks are rising. Tensions over sales of US military

equipment to Taiwan and heightened activity by Chinese military aircraft in Taiwan's declared

air defense identification zone are both key developments worth monitoring. And finally, Taiwan

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