Washington, D.C. 20549

(Exact Name of Registrant as Specified in Charter)

Delaware		811-04893		042942862
(State or Other Jurisdiction		(Commission		(IRS Employer
of Incorporation)		File Number)		Identification Number)
225 Franklin Street, Boston, Massachusetts (Address of Principal Executive Offices)				02110 (Zip Code)

(Registrant’s telephone number, including area code)

 

 

HSBC Asset Management (Taiwan) Limited 24/F No. 99, Tunhwa S. Rd., Sec. 2 Taipei 106, Taiwan		Tel: (8862) 2325-7888 Fax: (8862) 2706-5371

Market overview and portfolio performance

In December, the Taiwan Stock Exchange Index (the “TAIEX”) advanced 9.79% in U.S. dollar terms due to the appreciation of the NT dollar and the improved market sentiment from Taiwan’s favorable legislative yuan election results. Even though China enacted an anti-secession law aimed at Taiwan during the month of December, the negative impact to the Taiwan market was short-lived. An unexpected interest rate hike of 12.5 basis points by the Taiwan Central Bank also failed to send the Taiwan market down As to sector performance, the tourism and construction sectors were the best performing sectors, gaining 22.95% and 20.35%, respectively, month-over-month in December. The retail sector gained 12.39% month-over-month, driven by positive anticipation of sales increases from Christmas and year-end promotional events. The cement sector also did well in December, gaining 11.92% month-over-month, thanks to potential extension of a land tax cut into 2005. The technology and banking sectors also outperformed, gaining 10.63% and 8.61%, respectively, month- over-month. Despite bearish fundamentals for technology shares and the expectation that NT dollar appreciation would weaken exports, investors bet on large market capitalization technology shares after MSCI’s re-weighting of Taiwan. The steel sector was the worst performing sector, gaining 6.51% for the month on a significant drop in China’s demand and the fact that China is now becoming a net exporter of steel. The Taiwan Fund, Inc. (the “Fund”) overweighting in Information Technology (“IT”) hardware and communication brought positive contribution to the Fund’s performance, while our underweighting in the foundry sector and overweighting the steel sector brought negative contributions to the Fund’s performance.

Market outlook and portfolio strategy

We believe the market will continue a consolidation trading range before the Chinese New Year. We believe that the market will hold up well on the back of the following factors: (1) abundant liquidity; (2) healthy domestic demand; (3) strong demands from industrial cyclical sectors; and (4) cheap valuations. In terms of earnings, we are concerned about potential earnings downgrades for the year of 2004, due to slower-than-expected end-market demand for the electronic products and NT dollar appreciation against the U.S. dollar putting earnings threats to export-oriented sectors and downstream technology firms. We believe that domestic demand will remain relatively stable in 2005. The market is still trading at undemanding valuations at an average price-to-earnings ratio of 12.2x and price-to-book ratio at 1.7x as of December 2004. We see the market as likely to bounce back on the back of returns on equity and higher cash dividend yields (3% and above) and improving balance sheets. We believe the strong NT dollar against the U.S. dollar will continue to support domestic demand. In addition, those technology stocks with stable earnings growth and less demanding valuations should also attract funds into the market. Thus, we expect the potential buying opportunity to be driven by the domestic demand-related sectors, including financials and asset plays. It remains our strategy of adding domestic-related stocks, and reducing cyclical growth sectors going forward. We will also continue to search for quality small market capitalization stocks with growth potential. For the technology sector, we will increase our weightings of market leaders and those companies that have attractive cash dividend yield support.

Total Fund Sector Allocation

Total Net Assets: US$235.46 Million