Michael Turton

Made in Taiwan: 3 Funds for the Next Asian Market Bubble

Hi Tom! Good to see you writing about Taiwan.

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In March, a new president won power in Taiwan. This new president wants to mend Taiwan’s relationship with China… and eventually unify the two countries. This was the basis of his election platform. Restoring transport links between the two countries was his first step.
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The new President, Ma Ying-jeou, is from the KMT, the party that lost the civil war.

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Starting on Saturday, 36 flights will connect Taiwan and China every weekend. Several airlines – from both Taiwan and China – will fly between different Chinese and Taiwanese airports.
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Right. However, Chinese tourists can only travel on Chinese aircraft.

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In 1987, a new president won power in Taiwan… the first native Taiwanese to head the government.
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Lee Teng-hui did not become president until Jan of 1988.

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The new president started loosening regulations. He encouraged citizens to buy luxury American goods. He freed the press. He allowed opposition political parties to compete for power. He let Taiwanese citizens send money abroad. And he let Taiwanese citizens travel to China to visit relatives… for the first time since the revolution.
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All this began before Lee, although Lee expanded and consolidated these trends.

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The Taiwanese stock market loved these new policies. Between 1987 and 1990, Taiwan had one of the greatest stock market bubbles in history. Taiwan’s market rose from 1,100 to 12,054… a gain of 991%… and the Taiwanese currency rose another 40%. Foreign investors would have made 14 times their money in just three years by investing in Taiwan.
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Yes, I was living in Taiwan at the time. Money practically walked up to you on the street and begged you to take it home...

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Now I think we’re about to see another huge rally in Taiwanese stocks. Since 1990, Taiwan’s stock market has been the worst-performing major stock market in the world, except for Japan. Today the index is at 7,523. That’s a fall of 38% from 1990 levels.
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The bubble was pricked and since then the market has been flat. At present it is at a 20 month low and probably headed down. The market does not perform well because Taiwan's companies are not shareholder responsive, are not transparent, do not use it as a source of funding, and other issues. The market is not in a "huge rally" but in a state of collapse at the moment. It does not appear to have a bottom, falling 322 points to 6834 today. Ugh.

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The new president is freeing up regulations between Taiwan and China. Transport comes first. Capital regulations will come next. Taiwan’s new president has said he wants to help Taiwan’s financial industry go to the mainland. Hong Kong’s stock market rose 55% in 10 weeks last year after Hong Kong opened its markets to Chinese investors in August 2007.
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That was before the sub-prime mess, etc. President Ma's economic team is mired in 1970s policy solutions, and Ma himself is weak, not good at working with others, and despised by the elites of his own party, who carry on backchannel negotiations with China behind his back.

The negotiations on cargo links and other things Taiwan needs are not due out until the fall. The regulations that permit Taiwanese firms to invest in China may help individual firms but do nothing for Taiwan. I'd wait to see whether the market rallies before investing in Taiwan.

Michael