Reasons To Invest In Taiwan Mounting

September 03, 2014

Amid all nail-biting surrounding the global recovery, tech-heavy Taiwan keeps chugging along.

Taiwan has been outperforming this year, and it’s likely it will continue to do well relative to the U.S. market amid a solid macroeconomic outlook and a number of more localized variables that make the Asian country a standout among rebounding emerging markets.

The iShares MSCI Taiwan ETF (EWT | B-90), the ETF market’s proxy for the island nation off of China, has risen more than 13 percent this year—more than both the SPDR S&P 500 ETF’s (SPY | A-98) 9-plus percent and the iShares MSCI Emerging Markets ETF’s (EEM | B-98) 8-plus percent move this year, according to total-returns data compiled by StockCharts.com.

In the end, Taiwan finds itself in a sweet spot—it's tech-heavy country in the context of a well-run economy and generally improving trade relations with regional heavyweight China. Taiwan appears to be well-insulated from the fallout related to Europe’s fitful recovery, and it even finds itself the beneficiary of manufacturing shifts being implemented by Apple Inc. Moreover, it's also riding the emerging-markets bounce-back following 2013's selloff.

“From a macro perspective, Taiwan has a very solid economy,” said Darshan Bhatt, co-portfolio strategist of Jersey City, N.J.-based Glovista Investments. “There’s a fiscal surplus and a current-account surplus and a stable currency.”

Bhatt added that the way the Taiwanese dollar held firm in the 2013 third quarter while other currencies in the region, such as the Indian rupee or the Indonesian rupiah, crumbled against the U.S. dollar told the tale of macro-stability rather clearly.

Still, Taiwan isn’t without its head winds, as the Central Intelligence Agency makes clear in the Taiwan section of its “CIA Factbook.”

EWT_SPY_TSM_EEM_2014_Returns

Chart courtesy of StockCharts.com

The Apple Factor

Glovista’s Bhatt noted that Taiwan makes up 11.8 percent of the MSCI Emerging Markets Index that underlies the iShares ETF “EEM,” and that more than 25 percent of his firm’s emerging market allocation is currently devoted to Taiwan.

Part of that benchmark overweight is focused on Taiwan Semiconductor—the very firm that is picking up part of Apple’s chipmaking duties as the iPhone and iPad maker diversifies the sources of its microchips away from its South Korean archrival Samsung.

A measure of the Apple effect and of the importance of electronics to Taiwan’s economy and the Taiwan Semiconductor is the fact that TSM’s American depositary receipts are up by more than one-fifth this year. That’s the red line in the chart above, and it has outpaced the gains of EWT, SPY and EEM.

 

TSM, by the way, is the largest holding in EWT, making up about 20 percent of the portfolio, according to data compiled by ETF.com Analytics. The tech company is also the No. 2 holding in the broad-based EEM, with a 2.4 percent weighting.

The tech sector meanwhile takes up more than half of the EWT portfolio and 17.5 percent of EEM’s.

“The Taiwanese equity Index is dominated by the tech sector, and we believe this is a very good environment to own the technology sector globally, as you have growth recovering a bit here in the U.S. and also in other parts of the world,” Glovista’s Bhatt said.

Growing Trade With China

Growing trade with China also undergirds the Taiwan-focused investment thesis.

According to the Central Intelligence Agency’s “Factbook,” China overtook the U.S. as the No. 2 source of imports back in 2006 behind Japan, and China is now the No. 1 source of foreign direct investment. Going the other way, Taiwan is also loosening restrictions on Chinese investment in Taiwan.

“For a whole host of reasons, Taiwan continues to be positive,” said Bhatt, whose firm is currently adding to its Taiwan holdings.

All this is serious progress considering the underlying tension that has existed between the two countries since the People’s Republic of China was formed in 1949.

Mainland China has long coveted Taiwan as a lost province of the PRC, and Taiwan has become something of an unofficial protectorate of the U.S., even as its economy has flourished and its internal politics become more stable in the past 65 years.

Longer-Term Worries

But China-Taiwan economic ties—as well as the expansion of free-trade agreements in the region, with New Zealand, for example—may well hold the key to obviating what many analysts consider to be a potentially volatile geopolitical crisis in the making.

Still, the CIA noted that the Achilles’ heel of Taiwan’s economy may well be its heavy reliance on exports from the tech sector as well as machinery and petrochemicals.

“This heavy dependence on exports exposes the economy to fluctuations in world demand,” the CIA warned.

The agency also expressed concern about the longer-term economic effects of a rapidly aging population and a birth rate: “Taiwan's diplomatic isolation, low birth rate, and rapidly aging population are other major long-term challenges.”

 

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