Taiwan Set For Full MSCI Inclusion

June 21, 2004

Taiwan is set for a large flow of index and speculative cash, as MSCI has announced that it will be moving the Taiwain market to full inclusion in its global indexes.

In a move that is expected to see billions of dollars across Asian markets, and may well bode well for short-term Taiwanmarket returns, MSCI (Morgan Stanley Capital International) has said it will give full weight to Taiwan's stocks in its indexes. A Bloomberg News feature estimated that investors will need to buy about $4 billion of Taiwanequities just to track the benchmarks, with the possibility of even more cash moving as speculators step in to try to benefit from the shift.

Taiwanese stocks will see their weighting move from about 55% of their market value in the MSCI indexes up to 100%.  Taiwanis currently Asia's No. 5 stock market by value. MSCI has announced that the changes will take effect at the close of trading on November 30, and to 100 percent on May 31, 2005. MSCI set the standard for such large index transitions with the shifting of its global indexes to free float in recent years.  S&P is following suit this year with a one-year transition of its U.S.indexes to free float.

Anticipating the MSCI announcement, Goldman Sachs had on June 7 advised clients to buy more Taiwanequities, and forecast that a weighting increase would help the benchmark Taiex index rise as much as 30 percent in a year.

Similar to the free float moves, the increase in the Taiwan weighting results from the country's scrapping last July of restrictions on the amount of stock that overseas investors can hold. With the full market now available to overseas investors, more of the market entered the global float.  Accordingly, in April, MSCI started a consultation on whether to grant Taiwangreater representation.

The staggered index shifts that MSCI announced after going forward with the move is meant to dull the effect of the index transition, and make it very difficult to game the index changes, as myriad market factors are in play over the transition period.  Still all things being equal, investors are best served to try to get on the right side of such a large move, either by hedging the transition or by attempting to benefit from the market movement.

With 100% inclusion, Taiwanwould currently surpass South Koreaas the largest market represented in the MSCI Emerging Markets Index, making up 20 percent. The island would also account for 27 percent of the MSCI All Country Asia-Pacific excluding Japan Index, exceeding both South Koreaand Hong Kong, said MSCI in a statement on its Web site.

While the move is clearly a positive one for the Taiwan market, both South Korean and Hong Kong markets should be expected to suffer on net because of the index and speculative money that will move.  For investors who either would like to try to benefit from these moves, or to hedge them, there is a very easy way to access all three of the markets in a very targeted way.  The iShares MSCI Taiwan (EWT) and iShares MSCI Hong Kong ETFs both trade on the American Stock Exchange.  In the chart above 1 year performance of both is compared to that of the S&P 500.

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