Taiwan Votes for Closer Ties with Mainland China

Campaigning on a platform that includes closer economic ties with mainland China, and increased domestic spending, Taiwan's stock market surged after Ma Ying-jeou won the presidential election over the weekend.

Taiwan’s benchmark Taiex Index surged nearly 4% overnight on the news. A certain amount of this good news was already factored in by investors, since Taiwan has been Asia’s best performing market this year – up about 11% just since February 1st.

Still, the party in Taiwan shares may just be getting started.

In a January blog post (It’s Not Too Early to Search for Bargains Amid the Global Market Bust), I said: “Taiwan is one of the best global value plays (almost as good as Japan) on the planet right now. In addition, there’s a great election-year catalyst set to play out in Taiwan that could easily send this market sky-rocketing in 2008.”

In spite of recent gains in Taiwan, there should be lots more to come.

This week’s election victory for the Kuomintang should not be underestimated for its potential impact. And the market rally it ignited shouldn’t be taken lightly either. Trading volume on the Taipei Exchange swelled to twice its daily average over the past 3 months, as a record $1.9 billion of foreign cash inflows rushed into stocks. About 13 stocks advanced in Taiwan for each share that declined – that’s incredibly strong breadth.

Taiwan has always enjoyed close ties with the mainland, but for decades, politics got in the way. The specter of war has hung over Taiwan’s stock market for years. Periodic saber-rattling – on both sides of the Taiwan Straits – made international investors feel a bit uncomfortable. Now that’s all about to change for the better.

Taiwan’s President-Elect Pledges Closer Ties to Mainland

Interviewed on the campaign trail earlier this month President-elect Ma said: “Under my presidency, there will be peace and prosperity across the Taiwan Strait instead of confrontation and tension.”

He has also pledged to begin direct flights to China in just a few months, as well as loosen restrictions allowing Taiwan firms to invest more than 40% of their assets in China. Finally, Ma has talked about working “toward a common market across the Taiwan Strait,” according to Bloomberg.

Strengthening ties between Taiwan and the world’s fastest growing economy should be a major benefit to both. Now, politics is moving aside and that should allow foreign fund inflows to accelerate at a faster pace, having already hit a record in anticipation of this event. One Asian investment manager interviewed by Bloomberg put it simply: “There'll be significant synergy with China now.”

Taiwan enjoys a very favorable position because it’s loaded with capital: both financial and intellectual. Taiwan is one of the most prosperous nations in Asia, and for decades Taiwan business has helped finance the mainland boom. Taiwan also has more graduate-degree students per capita than any other nation in Asia, meaning that Taiwan has the know-how to help the mainland solve its problems and prosper.

Taiwan Stocks are a Much Better Bargain Than Shanghai

Setting aside all the hope about the future, one fact about Taiwan cannot be denied: its stocks area a screaming bargain compared to mainland China.

While the CSI 300 Index of domestic shares listed in Shanghai and Shenzhen continues to trade at more than 40-times earnings (even after a 30% decline since October), shares in Taiwan change hands at just 12 times earnings. Also, Taiwan stocks offer a healthy dividend yield of 4%. That’s very attractive dividend income in today’s low interest rate world.

I find China one of the most fascinating and potentially profitable markets to be invested in the years to come. But as long time readers of this blog know, I believe the best way to invest in China is through much more attractively valued markets such as Hong Kong and Singapore.

Global investors also have another choice for investing in China. It’s more direct – and a much better bargain – it’s a good time to invest in the other China: Taiwan.