iShares MSCI Taiwan ETF is Seriously Undervalued

If the Taiwan stock market “is massively undervalued” as the Bank Credit Analyst Research advisory says, then the iShares MSCI Taiwan Index exchange traded fund (EWT) is a tempting buy. It charges a management expense ratio of 0.85%.

One sign of the deep undervaluation is that dividend yields are 4% while 10-year treasury yields are 2%. This differential generates incentives for portfolio managers to switch out of bonds into equities, public companies to buy back shares, private companies to shelve IPOs, and private equity funds to launch leveraged buy-outs.

One cause of the undervaluation is a decline in the prices of Taiwan’s semiconductor chip exports relative to the prices of its commodity imports -- which has squeezed corporate profit margins. But commodity prices now appear to be correcting while corporate balance sheets around the world remain the healthiest in decades and thus quite capable of financing an uptrend in capital expenditures.

Another cause of the undervaluation has been President Chen Shui-Bian’s hardline policy on independence from mainland China. But as December parliamentary elections approach, his popularity is ebbing. The signs include corruption scandals, “hundreds of thousands” marching in the streets demanding his resignation, and polls showing the majority of Taiwanese businessmen favor a less combative stance toward China.

Related Articles: Is Emerging Market ETF Slicing and Dicing Necessary? • Bad Time To Invest In Mainland China? • Smart Investors Looking at Taiwanese Stocks

EWT 1-yr. chart:

Comments

[Vladimir Se...:]

Larry,

Interesting. It's not often that i get to read someone bullish on Taiwan and semis.
Could you show how you came to the 4% yield figure?
In your estimates, what is the current premium EWT is trading at? Isn't it and the management fee a bit too much for an ETF?

Also, you mentioned that commodity prices are now correcting. I'm not sure what you mean by "now". Are you referring to oil bouncing off 50 and flirting with 60? Or gold bouncing off it's October lows? Or are you convinced that it's all part of the act and the longer term trend is still down for commodities? If so, what is the timeframe that you see for that?
Thanks!

2007 Feb 18 01:35 PM

[bhusach:]

The 4% yield reported is incorrect. I recieved 41 cents per EWT share in dividends last year (2006). Given today's closing price of 13.91, the yield is approximately 2.9%.

I wonder why/how these journalists are allowed to post false claims. I've already made a few investments based on faulty numbers provided in similar news articles. I probably would not have made those investments otherwise.

Please check and double check your numbers before posting them next time.

Disappointed!

2007 Mar 20 01:55 AM

[Larry MacDo...:]

bhusach
What false claim? The 4% refers to the yield in the market. Holders of the ETF will get this less the MER on their ETF. Given the size of the MER on the Taiwan ETF, the yield will be closer to what you experienced.

2007 May 15 03:08 PM