Taiwan Turnaround

Robert Hsu, March 27, 2008

After the markets took a hit last week following the collapse of Bear Stearns and JP Morgan's buyout offer, this week's positive news reports caused markets around the world to rebound, at least in the first half of the week.

On Monday, JP Morgan announced that it had upped its bid for Bear Stearns to $10.32 per share. This was a significant improvement from the company's original $2-per-share purchase offering. In addition, it was reported that home sales rose 2.9% in February after falling 0.4% in January.

This encouraging data about the housing market, combined with JP Morgan's increased buyout offer for Bear Stearns, was well-received by investors. The Dow and the S&P 500 rallied on the news, both gaining 1.5% on Monday.

The rally on Wall Street was echoed on Tuesday by the international markets. After returning from a four-day holiday break, Asian markets also gained back some ground. Hong Kong's Hang Seng Index was up 6.4% on Tuesday, while the Tokyo's Nikkei 225 Index gained 2.1%.

Despite the early rallies this week in the domestic markets, American stocks resumed their downward trend after a weak durable goods report generated more concerns about the state of the U.S. economy. Foreign markets, on the other hand, continued their trek higher.

Much of the gains in the Asian markets this week can be attributed to JP Morgan's higher bid for Bear Stearns and lift in home sales, which heightened investors' hopes for a credits and housing recovery. But this wasn't the only reason for a pop in Asian markets this week. Recent news from Taiwan also boosted indexes in Asia.

The Taiwan Opportunity

On Saturday, a very important presidential election was held in Taiwan. The country's two parties -- Democratic Progressive Party (DPP) and the Nationalist Party -- held very different views in regards to Taiwan's relationship with Mainland China. The DPP wanted to keep ties between the Mainland and the island severed, while the Nationalist party is for strengthening the relationship between China and Taiwan.

The Nationalist party's candidate and former mayor of Taipei, Ma Ying-jeoh, won the leadership election on March 22, securing his spot as the new president of Taiwan. And during his address after the election, Ma stated that one of his main areas of focus will be to recast economic ties with Mainland China.

This is great news for Taiwan, as it will help the country out of its economic doldrums by tapping into the massive growth in China. The country's current president Chen Shui-bian and his DPP have promoted an isolationist policy during his term, and the island has been suffering from a slowing economy. Change is necessary to getting Taiwan's economy back on track, and that is exactly what Ma is focused on accomplishing.

How does Ma plan to set Taiwan up for growth, following some lackluster years during Chen's term? He wants to establish travel between the island and China through direct air links (which will allow airline passengers to buy a direct flight from Taiwan to China). This will increase the likelihood of more travel between the two countries – and flowing capital -- and boost both economies. Ma also wants to set new rules allowing Taiwan-based companies to invest a greater proportion of their assets in China within a year. In addition, he wants to allow more investments by Chinese companies in Taiwan. I think this is going to be a huge boost to Taiwan's economy as businessmen in the Chinese city of Xiamen, directly across from Taiwan, have already become very excited about Ma's victory, and are ready to grab any business opportunities that arise.

With a new president elected and change on the horizon, I expect 2008 to be the year for Taiwan's economic turnaround. Taiwanese stocks make up a big portion of emerging-market stock indexes, but they haven't participated much in the enormous rally that their Asian rivals have had in recent years. With cash set to more easily flow into the country from China, Taiwanese stocks now have the opportunity to grab their share of the growth happening in that emerging country.

Since Ma's Nationalist party won a landslide victory in parliamentary elections on January 12, share prices of many Taiwan-based companies have risen significantly. Taiwan's stock index has gained 7.4% in dollar terms since the election, compared with a loss of 10.4% for the MSCI Asia-Pacific Index.

Ma's presidential win will only add more momentum to Taiwan's financial markets. I think that the Taiwanese stock market has 15% to 20% upside in the next three months.

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