Emerging Markets: Taiwan
Taiwan, a beautiful little island just south of Japan. Maybe you haven’t heard of it. Rightfully so. Only a dozen or so countries in the world even recognize Taiwan as a nation. And, you definitely haven’t heard of any of those countries. I can’t even name them.
If you’re reading this website, though, you’re probably using something which had the majority of its parts made in Taiwan. To be honest, I’m not sure that Taiwan should count as an emerging market. The country was the recipient of much US backed aid and support throughout the 50s and 60s and from that influence blossomed an economy lead not by low skilled manufacturing but by a high-tech industry which rivals our own Silicon Valley. While most of the economies in the Pacific Rim are co-dependent, it’s hard to say whether or not there’s that much correlation between Taiwan’s markets and those in the rest of Asia.
It’s probably why it’s been left out from all the buzz about emerging markets. Taiwan’s TAIEX treaded water for the most of 2006, yet when the rest of the Asian markets sold off earlier this year, it was Taiwan’s which started a wild run of its own. The iShares Taiwan ETF (EWT) has run up nearly 20% in the last two months alone. (See Graph above) What brought this about?
Well, investors likely noticed that, while Taiwan doesn’t have the sexy growth that the rest of the emerging Asian economies have, it also was not plagued by the same volatility shown my China and India in recent months. While it was bad that Taiwan treaded water in a year when certain emerging markets were up 50 to 100%, it wasn’t so bad after when Taiwan’s markets continued to tread water during the sell off and now looked to be trading a huge valuation discount relative to newly inflated peers in Asia.
So, what’s not to like? High-tech economy, cheap valuations relative to peers in Asia, and the tide seeming to turn as far as investor sentiment towards Taiwan. Sounds like a slam dunk. Well, that’s not entirely the case. The country’s companies are at a huge disadvantage to many others in Asia as a result of the fact that Taiwan is a quasi-country with little to no real diplomatic power. Further, the current government administration has done everything it can to further isolate itself diplomatically while also upsetting its neighbor (and the country which lays diplomatic claim to the island of Taiwan), China. This is not good as it has resulted in mass capital flows out of Taiwan as Taiwanese entrepreneurs have started to simply leave the country and try their hand in China. Second, as China is Taiwan’s number one trading partner, the government’s current stance on trying to insulate itself and its businesses from China has done nothing but hurt Taiwan’s leading companies. For example, it was Taiwan’s cell phone carriers like Chunghwa Telecom (traded on the NYSE as CHT) and FarEastOne which could have taken the Chinese market by storm. Instead, they were barred from making investments in the mainland market and look now to have run out of growth options.
So, is Taiwan’s growth story over? Well, it would seem that the country is at a crossroads. While its domestic economy still has a ways to go before becoming fully modernized it is a lot farther along than most countries in Asia like China and India. As a result, you are not likely to find the kind of explosive growth there as you will in other emerging markets. That being said, a change in the country’s governments stance toward cooperation with China could pave the way for some dramatic returns as Taiwan is a country which would benefit enormously from the growing Chinese market, as nearly all the people there are Chinese by heritage anyway they don’t have to fight cultural barriers to participate in the mainland. Guess what? We’re in luck, a change in government may be on the way as elections are coming up at the end of this year and early next year. Current polls show that the more business and China friendly KMT party is likely to take back control of much of the country’s government and this should likely pave the way for reform and more open trade. (Another reason possible reason as to why Taiwanese stocks may be trading better. International investors loading up in anticipation of a regime change.)
So, how can you play the Taiwan space? Well, we’ve already mentioned the iShares Taiwan ETF (Symbol: EWT). There are also two other closed ended funds which trade on American exchanges – The Taiwan Fund (TWN) and The Taiwan Greater China Fund (TFC). The Taiwan Fund is rather similar to the iShares ETF, though it is actively managed, and has also traded at a discount to NAV as recently as March. (I can’t seem to find more data on it as its website seems to b down.) It also has much better weightings as the iShares Taiwan ETF tends to be weighted very strongly towards Taiwan’s two largest companies – Hon Hai and Taiwan Semiconductor. The Taiwan Greater China Fund is an interesting play as its stated goal is to invest in Taiwanese companies which get most of their revenues from China. A great way to play the growth in China without the volatility and ridiculous premiums. The Taiwan Greater China Fund is also trading at nearly 10% under its NAV.
Not interested in closed ended funds? Not convinced that Taiwan’s market as a whole will continue to appreciate, but still interested in playing some of Taiwan’s industry leading high-tech companies? Well, the good news is that you likely can do that as well. Disheartened companies in Taiwan have more often been skipping listing on the TAIEX and simply issuing shares in Hong Kong or the USA. And, as with many international countries, there are many companies which also issue ADRs (American Deposit Receipts) which are traded on US exchanges. Obviously, for American investors, those stocks listed here are probably most relevant so here’s a short list of Taiwan’s heaviest hitters. We’ve already mentioned Chunghwa Telecom (CHT), Taiwan’s version of Ma Bell the leading cellphone and telephone provider in Taiwan. There’s also the two of the largest semiconductor producers in the world Taiwan Semiconductor (TSM) and United Microelectron Corp. (UMC). In addition to producing most of the world’s semiconductors and computer chips, Taiwan has recently also laid claim to being the world’s largest producer of LCD panels and the leading company in Taiwan producing them is AU Optronics (AUO) which also lists an ADR here in the US. Two rather interesting plays on the Taiwanese economy might include GigaMedia (GIGM) and Advanced Semiconductor Engineering (ASX). The first produces broadband gaming technologies and the second does semiconductor design and testing.
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