Many international investors foresee a cooling of China-Taiwan tensions in the aftermath of Taiwan's March 23 presidential elections, and a local market rally sometime thereafter.
As a result, the managers are either boosting or maintaining their positions in Taiwanese stocks.
"After the election, we expect (Taiwan's) market to advance significantly," predicted Nick Patel, vice president of RCB International Inc., Stamford, Conn. He expects an easing of Taiwan's monetary policy, improved economic prospects for the island and that "China will be backing off" from the current sabre rattling aimed at Taiwan.
Just before the election, RCB, a manager of managers, was putting 1% to 2% of a Pacific Basin portfolio into Taipei's market, up from zero.
But the future of Taiwan, and the investment implications, will be far from resolved.
While an outright invasion of Taiwan seems unlikely, the threat illustrates China's willingness to flex its growing economic/political muscle. Some observers fear this attitude has implications for other locales, especially Hong Kong, which returns to Chinese control next year. At the beginning of last week, Hong Kong's Hang Seng Index plunged 7.3% partly because of rising tensions between China and Taiwan. (However, the market did rebound 2% the following day.)
Many observers believe China doesn't want confrontation with its neighbors. But on the issue of Taiwan, Beijing appears determined to return it to Chinese rule.
Therefore - even though current tensions should ease sometime after Saturday's elections - the possibility exists for future China-Taiwan flare-ups that could affect the markets in the area.
The future of China-Taiwan relations will depend heavily on Taiwan's leaders.
President Lee Teng-hui, who is likely to be returned to office, is widely expected to make some conciliatory gesture to Beijing afterwards, enabling China to back off of its current militarism.
From that, many observers expect at least some flight capital might return to Taiwan; its currency would require less support, allowing the government to further ease monetary policy; and local consumer confidence would rebound. For some investors, such an improving situation would be an invitation to invest in Taiwan - especially at current prices.
A bullish Foreign & Colonial Emerging Markets Ltd., London, sees Taiwan's market returning 54% in the next 12 months - with most of that gain coming later rather than sooner, said Humphrey Carey, head of the firm's Asia department. While its $23 million Taiwan Investment Company fund is holding its fully invested position, the firm expects to lift its Taiwan exposure in the $400 million Foreign & Colonial Emerging Markets Investment Trust, a global emerging markets fund, to 10% from the current 5.7% in the second or third quarter, he said.
Other moves by investment managers include:
Matthews International Funds, San Francisco, is in the process of increasing its exposure to Taiwan, said Paul Matthews, the firm's president. The firm expects to boost its Taiwan weighting after the election (assuming events play out as expected) to 7% to 8% of a Southeast Asian portfolio from 2% to 4%. Two stocks the firm particularly favors: Yang Ming Marine in shipping and Ton Yi Industrial, a tin plate manufacturer, said Carol Chuang, portfolio manager of the just less than $10 million Matthews Pacific Tiger Fund.
Daniel Chiang, president of the $283 million R.O.C. Taiwan Fund in Taipei, has been trimming his cash position as Saturday's election approaches, and now is almost fully invested. "Everybody knows this market (presents) a buying opportunity, and it's only a matter of timing" as to when to get in, he said.
Simon Hallett, portfolio manager, Scottish Widows Investment Management Ltd., Edinburgh, said his firm is "watching the market through this last phase of bad news. And we are preparing, if market pricing looks (appropriate) to raise our weighting to Taiwan's market around the time of the election." The firm, which has a "relatively small" exposure to Taiwan, would be looking at such sectors as building materials and transportation, he said.
The reasons for boosting Taiwan investment sound compelling.
Emerging Markets Investors Corp., Arlington, Va., has between 7% and 8% of its global emerging markets funds in Taiwan, said President Antoine van Agtmael. He views Taiwan's economy as "one of the soundest in the world," citing its "strong economic growth, a balance of trade surplus, a very high savings rate, very competitive exports (which, however, will suffer from some downturn in the computer cycle), huge foreign reserves, a well-educated population that is among the richest in Asia, and low inflation and low interest rates."
He expects the current China-Taiwan friction "will blow over in a couple of months."
But the broader story, of China's growing power internationally, will remain very much intact.
Mr. van Agtmael believes Taiwan's market already reflects tensions with China. Last week, for instance, the much-hammered $187 billion market stood more than 60% below its March 1990 peak. To help stave off further losses in face of high Taiwan-Chinese tensions, the government recently pooled an NT200 billion (about U.S. $7.28 billion) stock market stabilization fund - pooled from local insurers, banks, pension funds and postal savings funds - to invest in the equities market.
But even that hasn't been enough to stop the market's blood-letting: early last week, for instance, the market closed below a 4800 support level.
But post-election sentiment could be brighter, a prospect that is making the market's current valuations appear enticing to some investors. With its price-earnings ratio of about 14, investors point out the market is finally trading on near-term, rather than long-term, company prospects.
RCB's Mr. Patel hears "a lot of managers say 'we love Taiwan, (which) is undervalued.' But because they don't like uncertainty, these managers want to wait until after the election" before addressing the opportunity, he said.
But Joshua Feuerman, vice president, State Street Global Advisors in Boston, said his firm is maintaining its neutral weighting of 2.5% to Taiwan in a global emerging markets fund. While valuations are certainly attractive - Taiwan is trading at a 16% discount to its historic price-to-book value, whereas emerging markets overall are trading at around a 10% discount to their historic price-to-book value - corporate earnings aren't likely to be as strong in Taiwan, he believes.
In the next two years, company earnings in Taiwan are expected to grow at an annualized rate of around 8.5% vs. about 28% for emerging markets overall, he said.
"We don't think Taiwan's market will do better than the overall return of emerging markets. But we do think this should be a good year for emerging markets overall. So, Taiwan should have an average return" within that asset category, Mr. Feuerman said.