RPT-MARKET SIGNALS-Taiwan equities set for bigger bounce

* Investors could be drawn to Taiwan stock market

* Earnings prospects rate above those of China, Korea

* Asia playing greater role in Taiwan export demand

* Tech sector has cut inventories sharply (Repeats item first carried late on Thursday)

By Kevin Plumberg, Asia Asset Allocation Correspondent

HONG KONG, Sept 10 (Reuters) - Taiwan's tech-heavy stock market looks set to be a near-term draw for investors attracted by a relatively stronger earnings outlook and rising demand in China and other neighbouring economies for the island's exports.

Since global equity markets started to rally in March, the Taiwan benchmark stock market index .TWII has actually underperformed the MSCI index covering Asia Pacific ex-Japan .MIAPJ0000PUS, rising 65 percent against 79 percent.

Still, so far in September, Taiwan stocks have rallied to a 14-month high on solid trading volume. Foreign investors net purchases on Thursday, equivalent to $887 million, were the sixth highest on record.

Relative to their benchmarks, foreign fund managers in Asia with combined assets of more than $183 billion are most underweight in Taiwan and Malaysia, a Reuters poll showed on Wednesday. [ID:nHKG191801]

Relatively high valuations, mostly stemming from the IT sector, have kept investors cautious about Taiwan's market.

However, consistent upgrades to earnings outlooks, recovering exports and a heavy inventory drawdown may mean Taiwan deserves another look.

ANALYSTS KEEP LIFTING TAIWAN EARNINGS VIEW

For a graphic on how positive earnings revisions on Taiwan lead Asia: here

Taiwan's price-to-12-month forward earnings valuations, the second-highest among liquid markets in Asia, reflect bullish growth prospects, particularly in the tech sector.

Thomson Reuters Starmine shows 1-year forward earnings growth estimates in Taiwan of 38 percent, 3 percentage points higher than South Korea and 12 points over China.

Furthermore, latest earnings reports show average return on equity (ROE) for companies in the tech sector in Taiwan is 4.6 percent, higher than China, Japan and South Korea.

Consistent upward revisions to earnings growth since March and solid ROEs support the case for Taiwan stocks to be rerated as a higher quality investment.

EXPORTS RECOVER ON THE BACK OF ASIAN DEMAND

For a graphic on Taiwan's total exports and exports to China and all of Asia:

here

The 3-month moving average of total exports in Taiwan on a nominal basis has been rising for six consecutive months.

During that time, exports to the rest of Asia have made up an increasing share, as a record decline in U.S. consumer credit in July and a rise in the unemployment rate to a 26-year high in August confirmed the U.S. consumer is not ready to lead the economy out of recession.

Taiwan's export orders are also still growing, albeit not at the double digit month-on-month pace last seen in March.

So, companies that have already established beach heads in the Asian markets where domestic demand is expected to rise in coming years have an acute advantage.

Taiwan's relations with China are improving and they are currently negotiating deals to open their economies to one another.

Taiwan LCD makers such as AU Optronics (2409.TW) are predicting a return to profitability in the current quarter, in part because China's massive stimulus package is driving demand for its flat-screen TVs and personal computers.

Chip designer Mediatek (2454.TW) revised upwards its 2009 cellphone chip shipment target by 20 percent in August, largely on the back of growing demand for feature-jammed smartphones in China and other emerging markets.

INVENTORIES RUNNING TIGHT

For a graphic with Taiwan's inventory-to-shipment ratio and the OECD leading indicator:

here

Taiwan's tech sector for the most part has pared back inventory stock, so they will have to raise production as the global recovery generates a pick up in demand.

The sector's inventory-to-shipment ratio peaked at 1.5 in January, but has since tumbled to just over 1.

At the end of the first quarter, tech companies had cut their inventories compared with the fourth quarter of 2007 by an average $156 million.

Netbook PC pioneer Asustek (2357.TW) was the most aggressive, slashing inventories by $1.1 billion in the period.

The company posted a disappointingly large net loss of $3.9 million for the April-June quarter, mainly because of foreign exchange losses.

However, it expects shipments for the current quarter to rise as much as 50 percent over the previous quarter.

If a big rise in shipments is reflected across the tech sector, Taiwan's inventory-to-shipment ratio could easily fall below 1.0, auguring well for company production lines.

(Additional reporting by Kelvin Soh in TAIPEI; Editing by Neil Fullick)