Taiwan: The Other Election To Watch

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Mitt Romney’s win in the New Hampshire Republican primary may be dominating the headlines, but as CNN recently noted, the US presidential election isn’t the only race for top office this year worth closely watching. Right now, my attention is focused on an upcoming presidential election on the other side of the globe.

On January 14, Taiwanese voters will vote for their country’s next president. This election is particularly important for investors. Though many factors drive stock prices, a win for incumbent President Ma Ying-jeou would be supportive of Taiwanese equities. A loss, on the other hand, could be a tailwind for the market.

Ma, who has been in power since 2008, is viewed by the local business community as being much more focused on maintaining a friendly relationship with China than his opponent, Tsai Ing-wen, chairwoman of the Democratic Progressive Party (DPP). Tsai has publically criticized Ma’s efforts to create closer economic links with China.

Maintaining a good relationship with China is important to the Taiwanese business community because many Taiwanese businesses operate parts of their supply chain in China. Friendly ties with the mainland are also perceived by investors as good for Taiwanese economic growth.

Let’s look at what happened to equity valuations the last time a DPP leader was in office.

From 2000 to 2008, then President Chen Shui-bian pushed for Taiwan’s independence publicly and had what can best be characterized as a bad relationship with the mainland. Taiwanese businesses found it hard to invest in China, and Taiwan missed out on much of the global economic boom of the period. In addition, Chen was ultimately convicted of corruption.

During Chen’s presidency, equities in Taiwan, as measured by the MSCI Taiwan index, fell by 7%. In comparison, the broader MSCI Emerging Market Asia index rose by 117%.

Since 2008, when Ma replaced Chen as president, Ma has focused on fostering a better relationship with China. Under his leadership, stocks in Taiwan have performed generally in line with the broader developing Asian market. Since 2008, Taiwanese equities have dropped 24%, while the broader Asia emerging market index has dropped 18%.

Some market watchers are worried that if the DPP gains power, we could see a repeat of Chen’s term or at least a deteriorating relationship between China and Taiwan. In other words, a DPP win could have a negative impact on Taiwan’s business and economic growth in general. A Ma win, in contrast, could potentially mean a continuation of China’s current economic cooperation policy with Taiwan and could have a positive impact on Taiwan’s growth.

As Taiwan doesn’t allow local public opinion polls in the 10 days prior to presidential elections, the country’s equity market seems to have become especially sensitive to potential outcomes in the days leading up to the vote.

As of close Wednesday, the Taiwanese market appears to be reflecting a somewhat narrow win for Ma, which the most recent polls also showed. Since January 3rd, when the last local opinion polls were released, equities in Taiwan are up about 3% while the broader developing Asia index was up 1%.

Still, who will ultimately be elected and what his or her actual policy toward China will be is uncertain. In addition, election outcomes are just one of the many factors influencing Taiwanese stock prices. Another major factor is the state of the global economy, which has a huge impact on Taiwan’s export-driven economy.

For now, some analysts are expecting that investors will remain cautious on Taiwanese equities early this year. While I still hold a near-term overweight view on Taiwan, there is a chance that my view could change if the global economic environment changes along with the country’s political landscape.

Source: Bloomberg

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