Despite the recent earthquakes and valuations on the high end for emerging markets, Taiwan's economy and capital markets appear to be on solid footing entering the millennium.
A groundswell of foreign capital is moving into Taiwan in anticipation of the country's upgrade in emerging market indexes. Morgan Stanley Capital International decided to move Taiwan to a full weighting in its Emerging Markets Free and All Country Free index series from the current 50%. The move is a result of the government's easing earlier this year of limits on foreign ownership of Taiwanese shares.
Taiwan's equity market has regained some of the ground it lost after political tensions with China and the earthquake pulled Taipei's main index off its 1999 high of 8,608.9 on June 22. After plummeting 12% in July, the weighted index had returned by late October to the 7,700 level and closed Nov. 8 at 7,376.6.
Still, foreign investors have bought $8 billion more of Taiwan stocks this year than they have sold, pushing the market up about 16.6% as of Nov. 8. And just last month, Fidelity Investment's Southeast Asia Fund was given the go-ahead by Taiwan's Securities and Futures Commission to invest up to $200 million in the country, while Jardine Fleming was approved to invest up to $241 million and Bear Stearns & Co. Inc. up to $200 million.
Taiwan also might benefit from the flow of money into Asia's most risk-averse countries and sectors as investors get positioned for Y2K.
With large technology and electronics industries, Taiwan gets high marks for its preparedness for the potential computer problems associated with the new year. Compal Electronics Co. is cited by Morgan Stanley Dean Witter & Co. technology analyst Gurinder Kalra as one of several regional companies that are good millennium buys. Goldman Sachs recently listed Taiwan Semiconductor Manufacturing Co. as one of its five top picks "for the Y2K risk averse."
Michael Ding, the portfolio manager of the closed-end ROC Taiwan fund, is bullish on Taiwan's potential in 2000. "We can easily break the 10,000 point in the market and there is a good chance that we will break the historical high of 12,000 next year. I think the market has upside of 30% to 40% in 2000."
Mr. Ding said foreign institutional investors comprise only about 5% of Taiwan's trading volume, but domestic investors closely watch the movement of this money. "If foreign capital keeps pouring in, retail investors in Taiwan will want to buy."
Because of the country's long-standing capital controls, a number of institutional investors and Asia regional funds get their exposure to Taiwan through the $300 million ROC Taiwan Fund, which is managed by International Investment Trust in Taipei.
But Mr. Ding admits closed-end country funds are "not the hot stuff" since the government is increasingly allowing foreign investors to directly own stocks. The fund is up about 32% year to date and has about 45% of its holdings in the electronics sector. Its top positions include Taiwan Semiconductor, at 7%; United World Chinese Commercial Bank, 5%; and United Microelectronics, 5%.
The September earthquake was the worst in Taiwan's history but is not expected to slow the country's economic locomotive. Indeed, this year's gross domestic product growth is forecast at 5.5%, well in excess of last year's growth around 4.8%, according to Mr. Ding. "By most assessments, we are recovering much faster than most people would have suspected. We are back up to where we were before the earthquake."
The earthquake also eased the political tensions between Taiwan and China. Those tensions were stoked earlier this year when Taiwan President Lee Teng-hui outraged China by redefining cross-Strait relations as "state-to-state," which Beijing viewed as a move toward formal independence.
