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Taiwan: Another Asian Tiger - Mature, Yet Vibrant
By: Peter Kohli
Taiwan is essentially a developed market with an emerging market label. Their economy is so advanced that semiconductors, finance, communications, computers, insurance and other tech products make up 69.5% of their stock market–which happens to be the world's 7th largest in terms of turnover, ahead of London, Tokyo, and Hong Kong. This is no mean feat for an island country slightly smaller than Maryland and Delaware, and a population size ranked 51st worldwide!
One of the four original “Asian Tigers,” Taiwan has an export-based economy that has enabled it to build the world’s fourth largest cache of foreign reserves. Its 2012 GNP was U.S. $ 473.97 billion, making it the world's 18th largest economy.
Additionally, Taiwan boasts:
- a per capita GDP of U.S. $ 33,200 (#27), which puts it at a tie with Belgium and just a hair behind industrial powerhouse Germany (#26) with $ 38,400 (2012)
- an inflation rate of 1.1% (2013)
- an unemployment rate of 4.15% (11/13)
Taiwan’s industrial base produces 94% of the world’s motherboards and notebook PCs. Companies such as Taiwan Semiconductor Manufacturing produce most of the computer chips used by U.S. companies, such Qualcomm and Nvidia, and computers produced by global brands, such as Acer, Asus, Quanta and Wistron. While many of these high-value exports are final products, they are also intermediate parts and components that must be incorporated into final products, 70% of which are shipped to China for final manufacturing and re-export for sale in Japan, the United States, and the European Union, as well as domestic Chinese sales.
The Taiwan Stock Market has a fully automated trading system that is one of the most active and open exchanges in the Asia-Pacific region. Currently 31 foreign companies (US-Japan-Singapore-China/HKG) offer shares via TDR's (Taiwan Depositary Receipts) to local investors.
Similar investment opportunities are available in the U.S. Ten Taiwanese companies trade on the NYSE, NASDAQ and OTC, along with two Taiwan-specific ETFs, an MSCI Taiwan Index Fund (EWT), and the newly-trading First Trust Taiwan AlphaDEX Fund (FTW), along with several emerging market ETFs such as the MSCI Emerging Markets Index (EEM) and Vanguard FTSE Emerging Markets ETF (VWO). The largest is EWT. Opened in 2000, it has U.S. $ 2.8 billion in assets, holds 110 stocks and it's top five holdings—tech, financial, telecom—make up 36.13% of the portfolio.
The NYSE ADRs include such world-renowned companies as Taiwan Semiconductor Manufacturing, United Microelectronics and Advanced Semiconductor Engineering; Acer trades in London as a GDR.
Taiwan’s relationship with China is both the strength and weakness of its economy. While closer economic links with the mainland bring great profits in good times, the same ties pose challenges as Taiwan becomes economically dependent on a China whose growth has dropped precipitously; in 2013 China's GDP growth fell to a 14-year low of 7.7%.
Taiwan’s response is a balancing act. From June 2010 through June 2013, President Ma Ying-jeou signed three financial memorandums of understanding with Beijing, covering banking, securities and insurance. This opened Taiwan to greater investments from the mainland's financial firms and institutional investors, and also provides new opportunities for Taiwanese financial firms to operate in China—and keeps Taiwan and China firmly linked.
But as Chinese foreign policy in Asia grew sharply more aggressive and President Obama's “Pacific Pivot” included the Trans Pacific Partnership (TPP) free trade agreement that links 65% of American exports to 12 Asian countries (excluding China), Ma began to diversify Taiwan away from China. In 2013 Taiwan signed two free trade agreements; the first with New Zealand and then another with Singapore. And recently Ma said Taiwan must work hard to join both the TPP and the 16-country Regional Comprehensive Economic Partnership (RECP) this year to avoid being marginalized.
More trade deals will enable Taiwan to increase its market share and help it catch industrialized peers Japan and South Korea. Investors would do well to remember Taiwan's impressive work ethic. In 1965, after having received some U.S. $4 billion in postwar aid from the United States, Taiwan became the first recipient to no longer request it—and its GNP rose from U.S. $2.85 billion in 1965 to U.S. $490.50 billion in 2012.