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: