Taiwan, a key player in the Asian economy and the global technology supply chain, has recently grabbed the attention of the regional derivatives industry. Following MSCI’s shifting of most of its product licenses to Hong Kong’s bourse from Singapore, the number of markets in the region offering index futures products tracking Taiwan’s broad equity market has now increased to three.
The growing suite of Taiwan-linked index futures contracts in the region varies in terms of specification, size and access to different venues, each with its own infrastructure and services. While Singapore and Hong Kong markets are more institutional-based, Taiwan Futures Exchange (TAIFEX) sets itself apart with more active retail participation. This client group contributed to about half of the trading in TAIEX Futures, and together with institutions, pushed the volume of TAIEX Options – the world’s sixth most traded equity index option – to a record high in the first half of 2020.
The proliferation of products tracking the same market may result in more vibrant derivatives trading. An example is Nikkei and TOPIX futures which trade on their home turf in Japan, as well as on offshore markets and in various forms in Taiwan, Singapore, the US and Brazil. This, as a consequence, creates ample cross-market trading and hedging opportunities, generates larger trading volumes for exchanges, and facilitates greater liquidity and price discovery – an outcome that is positive for all market participants.
For investors in the era of Covid-19, portfolio diversification across regions and continents has become more critical than before. With country and regional exposures playing a larger role in investment decision-making, the market of Taiwan – the top of 75 emerging economies as scored by Bloomberg whose economy is running close to pre-virus level – is gaining substantial traction from international investors as they are especially upbeat about the island’s ability to contain the spread of Covid-19.
The market’s tech-heavy nature is also benefiting from the recent tech-led market rally. Soaring demand for Taiwan Semiconductor Manufacturing Co. (TSMC), the world’s largest and most advanced contract chip manufacturer, brought it close to becoming the world’s 10th most valuable publicly listed company, leading the TAIEX towards its all-time record.
The outperformance of TAIEX over most other major international indices indicates the heightened global demand for gaining exposure to Taiwan. The average daily trading value of foreign institutions in Taiwan’s stock market went up by 40% in the first half of 2020, compared with a year ago. Likewise, the average daily volume of foreign institutions in Taiwan’s futures market grew by 76% during the period. As investors actively access its platform for hedging and strategic trading, TAIFEX delivered a robust half-year performance with over 173 million contracts traded, marking a historical high.
During this challenging time and amid increased volatility in the marketplace, it may also be the time for investors to revisit their approaches in response to growing liquidity and execution risks. The fact that Taiwan-focused index futures are now available in Taiwan, Hong Kong and Singapore is a development that will benefit all market participants. With gaining Taiwan exposure becoming an increasingly essential part of any investor’s portfolio from both regional and global perspectives, the demand for trading Taiwan-linked derivatives will continue to rise further in the future.
Wu Tzu-Hsin is the new chairman of Taiwan Futures Exchange