Taiwan is a significant component of the EM MSCI and has drastically underperformed the index during the greatest bull run in Emerging Markets. Why? Economic impact of the political relationship with China has affected earnings and also forced investors to price in additional risk to Taiwanese companies. Evaluate the current election result in the context of broader economic change as well market momentum into 2008 as investors are looking at relative value within the asset class.

This weekends emphatic election result in Taiwan provides a prelude to the more important presidential elections in March where the KMT party is expected to to gain the president’s office. The parliamentary election cements the role of the Kuomingtang Party(KMT) on the legislative branch, and signals greater change away from isolationist policies of the DPP party and president Chen.

The investment thesis is simple: the KMT party(the Nationalist Party) seeks more open economic ties with mainland China and will also take a less confrontational path to sovereignty for Taiwan with the mainland. Valuations for Taiwan companies have been held back due to a perceived or actual( you decide) risk that they are less exposed to Chinese growth/demand/valuation premium than other Asian, or EM peers. Removal of the investment restrictions upon Taiwanese companies will allow for greater exploitation of a natural trading advantage they may have with the mainland.

Taiwan underperformed GEM by 37% last year and effectively finished the year flat, as both growth multiples and risk perceptions were adjusted to price in the lack of China exposure and risk of political reprisal form the mainland ( as well as a heavy gearing towards US tech sector ). Taiwan trades 15-20% cheap to consensus estimates of 2008 PE, and 20% cheap on earnings growth to GEM. Investors have been underweight the benchmark and this could be changing.

Taiwan is a heavily skewed towards technology and some of the cheapest stocks in emerging markets are in Taiwan. The sectors with most to gain from any change in the China relationship may in fact be basic materials, commodities. Investing through US listed ADRs is not the most efficient way to get exposure in Taiwan as core industrial and commodity exposure is listed locally. Yet, as part of tthhe mission of the Seygem A-Z blog is to provide insight into US listed plays across GEM – we offer the following:

Comments feed (RSS 2.0), comment or trackback from your site.

Despite today’s fall in VIX, volatility is at 5 year highs. This is a great place to reinforce macro GEM views and seize upon either price weakness or get paid from volatility. Emerging markets – especially when analyzed across specific country lines are not a fad, or even a bubble, but a 10 year growth story. Despite what I can argue on the “decoupling” from developed markets, GEM will trade in sympathy with global markets especially during extraordinary market events. Yes, earnings growth could slow from 15-20% to 5-10% and GDP will be revised down 75-200bps in GEM in 2008 but the top core markets are growing organically and can expect significant state spending to buffer external factors.

Sell volatility today to get implicitly long out 6 months. Sell 6 month out of the money Puts in down 10-20% in core GEM ETFs, especially those who are running annualized vol north of 45%.

Annualized volatility in EEM(GEM MSCI) is 45%, EWZ (Brazil) 52%, FXI China 60%

Many of these country ETFs are already down 20% from their highs; by taking a view on an index you are removing company factor risk which is a potential concern for any company out 6 months. By selling the obligation to buy the ETF (a view on a country) at a price you are happy to own it(down another 10%?, 20%) you are getting paid now whether you get exercised or not. Your risk is that you don’t get exercised and your opportunity cost in never actually owning the mkt as it trades higher(and you wanted to own it at that level) without hitting your strike.

Comments feed (RSS 2.0), comment or trackback from your site.

With the Fed having moved 75bps between meetings, targeting slowing growth(with less focus on inflation) we are going to here more and more remonstration directed at the ECB on their reluctance to cut rates, and the root of this stance. Real rates are now probably 100bps higher in Europe than they are in the US and inflation is more contained than the US. Europe will be unable to escape slowing, not because the US sneezes but because their consumers will also be choked off. The fallout from subprime and excess liquidity in global markets for years is that a bubble was created in real estate( as a hard asset play, and with cheaper money to buy more home) all over the world. Spain, Italy, and UK housing markets are struggling. European banks have more bad debt on their balance sheets than they have reported. Risk is being unwound massively around the world. This is not going to abate.

The ECB seems to be too concerned in trying to establish an anti inflation vigilance( a la the Fed) and seems to be missing the point. The Fed has historically been the leader of the independent global central banks. This more due to the impact of the US economy on the global economy than anything, but also that the Fed has been a more dominant institution with longer legacy. The ECB seems too concerned with trying to establish its own legacy. This is not about having to follow the American lead, this is about the doing whats best for the regional economy in Europe. As more bodies rise to the surface(especially in Europe) over the next couple weeks this point will be even more in focus. ECB needs to cut rates.

This morning GEM looks cheap on a historical basis and even relative to the recent levels we saw in the fall. Trading at about 13.5X trailing earnings with prospect of 16% earnings growth ( Morgan Stanley estimate) buying EM here is not difficult on a longer term view that will outlast the current vol and global growth uncertainty. Another 10% down and Russia is a screamer.

Comments feed (RSS 2.0), comment or trackback from your site.

While the decoupling debate of emerging mkts to developed markets rages on– EM investors who are on the fence can look at the cellular sector in EM as being defensive during a period when there is a question about top down growth. Disposable income is growing in places like the , Latin America, Middle East, Russia and obviously India and China. Getting exposure to consumer is often best and most efficiently found in the cellular sector where the increased spending on phone services reflects rising wealth effect. According to a recent Goldman Sachs report, there are 300m middle class folks in the BRICs ( more than 3K per year…this will grow to 500MM in 2010 and 1.4Bn in 202GDP growth may be revised down slightly across GEMs but domestic demand remains robust. Domestic will rise in Russia and China this year and fall a bit in Brazil and India. India presents the best example of the demographic and growth opportunity. Only 21% of the Indian population uses a cell phone yet this market is growing at 8mm subscribers a month. The cellular market remains one of the most competitive and high margin businesses for domestic companies in various emerging markets, as well as for some of the legacy players globally(ATT, Vodaphone, DT). Two of the top ten companies in terms of revenues are located in emerging markets. Speculation says that in ten years US and European carriers will have 40% only of the global mkt. Having watched Vimpelcom and Mobile Telesystems up close for the last ten years, I have witnessed staggering penetration and profitability. These two companies, like others in the sector are looking outside their backyard(Russia and Eastern Europe) and have already begun to move into Asia and Africa. Their knowledge of how to operate in an emerging market gives them an edge over many of the western players.

Names to watch in Middle East
Orascom Telecom
MTN

Names you can BUY:

Latin America
NIHD·
AMX

Eastern Europe
VIP
MBT

China:
CHL
CHU

India:
Western guys like VODAPHONE AND ATT are best proxy for this growth…. (ATT is gaining wireless spectrums and has teamed up with local wireless provider Mahindra.)

Comments feed (RSS 2.0), comment or trackback from your site.

What we did learn from Friday’s silly close in the US is that hedge funds are positioned for more doom and gloom, thus we are either near a bottom (when everyone believes the market is going lower…) or someone is actually looking at the bond mkt this time for the appropriate signals on the health of the credit markets(where all of this started). Short interest remains huge everywhere but emerging markets not only have traded better than developed markets, the vol has come down appreciably. As I stated on the Fast Money on Friday, emerging markets are trading different because they are different. We got a slew of data from the key markets last week(BRICs) and with exception of Chinese inflation(…shouldn’t global slowing take some of the strain out of Chinese prices therefore this is good). GDP growth was revised up in Russia to 7.4%, exports were UP in China in January, the Real strengthened all the way to 1.70 last week on strong trade data and CB reserve build up(can you say upgrade?). The currency which reflects the growing fiscal reserves and robust trade balance, is chugging along towards the levels of when there was a fixed peg… …Now that we have spoken of hedge funds, the bigger question remains the sentiment of long-only funds and locals. This is where the next leg will come from.

EM news from today that is interesting to me:

Hungary abandon HUF floating band; HUF positive

India: Banking consolidation in India continues: HDB and Centurion have agreed in-principle to merge. HDFC Bank will be adding distribution and growing at a time when state is getting sector ready for foreign competition. State Bank last week raised 2.5Bn$ as government is looking to capitalize this bank and take on others in the sector.

Mexico: Antitrust agenda remains negative for large Mexican companies: TV, Telmex, Walmex; Ultimately this is good for ht economy and will augur higher growth potential like Brazil and Chile.

Comments feed (RSS 2.0), comment or trackback from your site.