Taiwan: A Contrarian Call In Asia

Nicholas Vardy

Nicholas Vardy has a unique background that has proven his knack for making money in different markets around the world.

Some blame political tension between the government of independence-minded President Chen Shui-bian and China’s communist leaders. Others point out that Taiwan’s stock market is heavily weighted toward technology firms at a time when global investors are happier buying the Asian domestic demand plays.

But that negative perception is changing. While global markets spent most of the month of June in a credit scare-induced funk, Taiwan was up 8.36% — hitting a seven-year high. And here is why we expect this week’s Global Bull Market Alert pick, iShares MSCI Taiwan Index ETF (EWT), to continue its surge over the next few weeks — even as global markets tread water into the summer.

First, after sitting out much of the Asian share boom, Taiwanese stocks are just plain inexpensive compared with other Asian markets. Citigroup recently upgraded Taiwan to overweight from underweight and pointed out that valuations there are as cheap as they’ve ever been. In Singapore, the ratio of share price to book value of companies’ assets has hit a 17-year high. In Taiwan, the price-to-book ratio is below the market’s historic average over the past 17 years. Taiwan’s valuations have hit levels only seen in crisis periods — with no glaring crisis in sight.

Second, the market is shifting from a pure value play to one supported by new found momentum. JP Morgan reports that there’s been a surge of foreign capital into the market in recent weeks. As of last week, foreigners have been net buyers of about $5.2 billion of Taiwanese shares. As one analyst put it, "The hedge-fund guys are looking for the next Malaysia." That explains why the Taiwanese market recently has outperformed others in Asia. Taiwan’s main stock index is up 12.15% since the start of the year but 12.4% has come since the start of May.

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Third, it pays to go contrarian in Asia. Although the consensus favors Singapore and Southeast Asia and dislikes Taiwan, Citigroup is betting on exactly the opposite strategy. As it pointed out in its research: "Since 1995, it has always paid to go against the consensus asset allocation… It pays to buy into markets when no one likes them and sell those markets that are in the spotlight." Since June 1995, following the consensus on Asian equity investments has led to underperforming the benchmark by 3.9%, while going against the grain has outperformed the benchmark by 21.1%.

Finally, Taiwan will have a presidential election in March 2008. And the candidates of the island’s two main political parties are likely to take a more conciliatory approach to relations with Beijing than the current government. There is good reason for neither Taiwan nor Beijing to upset the apple cart. China has Taiwanese investment to thank for turning the Chinese mainland into a global leader in information-technology (IT) equipment assembly — and for overtaking Japan and Taiwan to become the world’s second-largest IT hardware producer after the United States. The list of China’s top 200 export companies is headed by subsidiaries of Taiwanese IT firms. Today, more than 60% of these exports are made in China by Taiwanese companies. So the next time you see "Made in China" on your new computer, realize that the profits are probably going into capitalist Taiwanese coffers.

So buy the iShares MSCI Taiwan Index ETF (EWT) and place your initial stop at $15.20. For even bigger upside, I recommend the December $15 call options (EWTLC).


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To make room for the Taiwanese ETF, move our position in NII Holdings (NIHD) out of the Global Bull Market trading portfolio. We recorded a solid 10% gain on our Latin American telecom play and made 29.82% on the options. For those of you with a more long term perspective, hold on to NII Holdings, and place an 18% trailing stop to protect your downside.

P.S. Join me at the 29th Annual Money Show in San Francisco
I invite you to sign up for this year’s Money Show, July 26-28, 2007, at the San Francisco Marriott located in the heart of the city’s picturesque downtown. Join over 50 of the country’s premier policy analysts, advisors, and money managers who will share their best strategies for taking advantage of economic, political, and market opportunities to grow your investment assets. You can choose from over 150 educational workshops and 15 panel presentations. The show also features a state-of-the-art exhibit hall with more than 125 of the finest financial companies in the country displaying their cutting edge products and services. For complete details or to register for free admission, call 800.970.4355 (be sure to mention priority code #007384), or visit: The Money Show San Francisco’s Home Page. You’ll also want to hear me speak at FreedomFest, scheduled for July 5-7 in Las Vegas. To sign up, call Tami Holland at 866.266.5101 or register online.

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