Just last week – for the first time in 60 years – Taiwan opened its doors to investments from Mainland China. The impact was almost immediate. On Friday, Guangzhou-based China Southern Airlines Ltd. (NYSE ADR: ZNH) submitted the first bid under the new regulations and became the first mainland company to apply to invest in Taiwan.

By the day’s end, three more of China’s air carriers had joined the race and filed applications to invest in Taiwan: Air China Ltd. (OTC ADR: AIRYY), China Eastern Airlines Corp. Ltd. (NYSE ADR: CEA) and Hainan Airlines Co. Ltd. Clearly, these companies understand the stakes here, which is what’s behind the rush for these potentially lucrative new routes between Taiwan and China.

Speaking for China Southern, spokeswoman Zeng Qingning noted in theTaiwan News “we can begin selling tickets once our office is approved to become a branch.” My experience suggests that other companies are well advanced in their preparations too, which is why this probably isn’t the last we’ll hear on this topic.

One-Way Street

Just last Tuesday, Taiwan’s Ministry of Economic Affairs (MOEA) announced that China-based companies and investors would be permitted to invest in more than 100 different product-and-service categories, and that regulations governing applications by China-based companies seeking to open branches or subsidiaries in Taiwan also were ready.

These initiatives were an outgrowth of several new investment accords reached in May between the Association for Relations Across the Taiwan Straits (ARATS) and the Straits Exchange Foundation (SEF). When I reported on these at the time, I told Money Morning readers that they literally were watching history in the making just as I was from my perch in China as the news unfolded.

Prior to last week, “cross-strait” investments had been a one-way street – from an official standpoint, at least – with Taiwan companies having invested hundreds of billions of dollars in Mainland China,including about $77 billion since just the late 1990s alone, The Wall Street Journal Asia reported.

In return, China’s been allowed absolutely zilch and has been legally barred from making investments in Taiwan. The fear – at least what’s been stated publicly – is that China would use its rapidly expanding economic might to blunt Taiwan’s efforts to remain an independent nation.

(You may recall from your history books that China views Taiwan – formerly known as Formosa – as a “breakaway republic,” a position the island nation has held since 1949, when the two split during a civil war that led to the creation of the communist-controlled People’s Republic of China.)

China’s Newfound Role as an Economic Savior

Behind the scenes, however, the story is much different. Many Taiwanese business leaders I’ve spoken with confidentially welcome normalized relations and view the opening process as a development that’s long overdue. For them, it’s not about political aspirations; it’s about what China can do for their over-leveraged, underutilized assets. Many, including new Taiwan President Ma Ying-jeou, for example, are acutely aware of the fact that Taiwan missed out on many of the benefits of China’s rapid industrialization and global emergence over the past 10 years, thanks to poor political relations and antagonistic regulation.
And it’s cost Taiwan dearly. The desire for continued independence aside, once-proud Taiwan has become another in a long list of nations around the world that are eating big slices of humble pie and that now see China as a potential savior from the current global financial crisis.

Taiwan’s experience with the Taipei 101 Tower is a concrete example of the potential benefit of China’s emerging economic might. The tower was supposed to stand as a symbol of Taiwan’s newfound economic prowess and, at the time of its construction, was the world’s tallest building.

But it soon became a colossal white elephant. In fact, until very recently, it stood less than 50% occupied. That’s when several of China’s corporate powerhouses took up residence, including:

• Lenovo Group Ltd. (OTC ADR: LNVGY), the growing global PC giant.
• Sinosteel Corp., the major iron-ore importer.
• And Tiens Group Co., a China-based direct-selling conglomerate that is the world’s fifth-largest healthcare products firm.

According to The Wall Street Journal, the building is now more than 80% occupied and rents in the area have risen by 5% to 10% in anticipation of more highbrow Chinese clients. Of course, it doesn’t hurt to have such big-name players as Bank of America (NYSE: BAC), Google Inc. (Nasdaq: GOOG) and even Merrill Lynch (NYSE: SAR) as tenants, but the reality is that the Mainland China companies are the firms that are really being sought right now. That’s particularly true at a time when the mainland economy remains on track for annual growth of 8% or more this year, and appears to be the only one of the world’s top industrialized economies that’s not in a deep state of denial or contraction or both.

The fact that China’s bucking the trend is not lost on the Taiwanese business community. Nor is the fact that many of the best-positioned and fastest-growing Mainland China companies are state-owned enterprises.

“In contrast to the past, when this was seen as a threat, they’re more attractive now for their deep pockets,” said one local real estate professional I interviewed who wanted to remain anonymous.

Not surpassingly, the welcome mat is not out for military-backed enterprises. Nor does it include potential investments in high-tech or real-estate-development projects. I think that will change, particularly if Taiwan’s economy registers a couple more consecutive quarters of contraction, and if its companies continue to experience weakened global demand for its products.

The Art of the (Asian) Deal

Despite the very clear need, Taiwan is still trying to exercise some caution in deciding which deals to approve. According to Deputy Economic Minister John Deng, if the capital comes directly from China the economics ministry will review it. Capital coming from third party destinations “investing over 30% in, or effectively controlling local companies” falls under the same scrutiny. Likewise, Deng noted, if China invests in more than 10% of a company’s stock, it will be “seen as [a] direct investment.”

So far, the first couple of Mainland China delegations have already reached $68 billion worth of deals in various industries.  Some are undoubtedly smaller and involve a smattering of the 200 industries open for direct investment, but it’s the bigger transactions that have everybody excited because they are a harbinger of better times and more profitable relationships ahead.

In April, for example, China Mobile Ltd. (NYSE ADR: CHL) offered $527 million for a 12% stake in Taiwan-based FarEasTone Telecommunications Co. Ltd. Because it was made prior to the new rules and involved the politically sensitive telecom industry, the consensus is that the deal won’t pass scrutiny. But you never know and that’s part of the thrill of the hunt.

Portfolio manager Henrietta Luk of Melchior Asian Opportunities Fundnotes that “local retail investors have gone on a treasure-hunt frenzy guessing which is the next industry or company to link up with China, leaving foreign investors chasing any stocks that are not limit up to make up for their hugely underweight positions in Taiwan.”

And they will have to chase them – literally. According to the Taiwanese Tourism Board, more than 300,000 Mainland Chinese visited Taiwan through April of this year, versus 320,000 during all of 2008. The number of mainland airports serviced from Taiwan has increased from 21 to 27, while the number of direct flights has soared from 108 to 270 per week, an increase of 150%.

Given that jump, it’s no surprise that China Southern Airlines submitted the first bid under the new regulations – or that the three rivaling carriers joined the hunt that same day.

If you’re of the same opinion, and want to attempt to ride this wave yourself, consider getting started with an investment in an exchange-traded fund (ETF) – specifically, the iShares MSCI Taiwan Index Fund (NYSE: EWT). With top holdings in computer hardware (42.44%), industrial materials (21.93%) and financial services (16.42%), you’ll no doubt hit something on China’s wish list soon.

Watch for agreements either late this year or early in 2010 that will permit the two countries to trade one another’s shares for the first time in 60 years – and then watch for the huge jump in liquidity that goes with it. I’ve been hearing for several months now – very quietly, I might add – that regulators in both Taiwan and China are considering a dual-listing agreement that would at least partially remove restrictions that prohibit individual investors from directly investing in each other’s stocks.

There’s clearly a long way to go here with regard to the global financial crisis, but the flurry of cross-straits activity we’re seeing and the accelerating nature of the activities there provide important confirmation that we’re on the right track.

I have no doubt that Taiwan will turn out to be one of the region’s powerhouse investments over the next five years – albeit one that is more closely tied to Beijing’s fortunes than many people on this side of the Pacific are inclined to accept.

Source: By Opening its Doors to China for the First Time in 60 Years, Taiwan Paves a New Path for Investor Profits

Editor’s Note: Fourteen trades. All profitable. Since launching his Geiger Indextrading service late last year, Money Morning Investment Director Keith Fitz-Gerald is a perfect 14 for 14, meaning he’s closed every single one of his trades at a profit. And he did this during one of the most volatile periods for the U.S. stock market since the Great Depression. Fitz-Gerald says the ongoing financial crisis has changed the investing game forever, and has created a completely new set of rules that investors must understand to survive and profit in this new era. Check out our latest insights on these new rules, this new market environment, and this new service, Geiger Index. ]]> http://www.contrarianprofits.com/articles/by-opening-its-doors-to-china-for-the-first-time-in-60-years-taiwan-paves-a-new-path-for-investor-profits/18799/feed 0 http://www.contrarianprofits.com/articles/what%e2%80%99s-next-for-the-fastest-growing-foreign-markets/18577 http://www.contrarianprofits.com/articles/what%e2%80%99s-next-for-the-fastest-growing-foreign-markets/18577#comments Tue, 30 Jun 2009 22:45:47 +0000 Andrew Gordon http://www.contrarianprofits.com/?p=18577 It’s the perfect time to make money from some of the world’s fastest-growing markets as long as you invest in them the right way.

Several countries have seen their markets surge in the past three months: India’s market shot up 50.3 percent, Indonesia’s 39.5 percent, Singapore’s 32.8 percent, Russia’s 32.5 percent, Hong Kong’s 31.7 percent, and Chile’s 29.6 percent. But the world’s most expensive major market rose a relatively modest 24 percent. Take a look at the chart…

Taiwan’s market is outrageously expensive. In terms of price-to-earnings (P/E), it’s going for almost twice the P/E ratio of the UK’s – the next most expensive market.

Things are beginning to look up in Taiwan. Its big chip sector is seeing light at the end…

Indeed, its largest first-quarter investments included:

• $50.9 million in Vanguard Emerging Markets ETF (NYSE: VWO)
• $1.5 million more iShares MSCI Brazil Index ETF (NYSE: EWZ)
• $1.1 million more into in iShares FTSE/Xinhua China 25 Index ETF (NYSE: FXI)
• $877,700 into Van Eck’s Market Vector Russia ETF Trust (NYSE: RSX)
• $817,300 into iShares MSCI Mexico Index Index (NYSE: EWW)
• $390,400 more into iShares MSCI South Africa Index (NYSE: EZA)

Harvard’s fund also took a first-time, $45.5 million position in iShares MSCI South Korea Index ETF (NYSE: EWY), as well as two foreign titans – a $16.7 million stake in China Mobile Ltd. (NYSE ADR: CHL) and a $12.6 million stake in Israel’s Teva Pharmaceuticals Industries Ltd. (NASDAQ ADR: TEVA).

Obviously, an institution such as Harvard does its homework before making such an aggressive play call, and committing so much money to the emerging economies of the world – global regions whose stock markets took even bigger hits than the United States’ Standard & Poor’s 500 Index.

Since the market bottomed out at 676.53 on March 9, the S&P 500 has gained an impressive 34.2%.

During that same span, however, the ETFs that received Harvard endowment dollars have handily trounced the performance of that U.S. bellwether index. Just as an example: Vanguard Emerging Markets ETF is up 58.1% and iShares FTSE/Xinhua China 25 Index ETF has gained 51.2%.

And the overall MSCI Emerging Markets Index ETF (NYSE: EEM) – which measures a 26-country-tracking index of the same name – is up 55.2% since the bottom.

Emerging Market Professors

One of the market professors Harvard is listening to is Robert G. Doll Jr., vice chairman and chief investment officer for private equity fund BlackRock Inc. (NYSE: BLK). Doll said earlier this week that the global economy has likely seen the worst of the worldwide financial crisis, and that developing economies are already emerging from recession.

“If, in fact, we have seen a bottom in markets and economies are going to recover, the emerging parts of the world will recover the most and the fastest,” Doll told Bloomberg News. “After all, their recessions were largely unwanted inventory build-up and not the credit bust in the Western world.”

Earlier this month, Doll said he believed the S&P 500 would fall from its current levels (which it had), and then rally to end the year at around 1,000 – for a gain of about 11%.

“Emerging markets, if they are going to do better than that, are going to do closer to 20%,” Doll said. “There are some that already have. Some have done better than that.”

A couple weeks before Doll’s vote of confidence, Mark Mobius, famed investor and head of Templeton Asset Management Ltd., said that emerging-market stocks are building a base to enter a bull market at the end of the year, Bloomberg reported.

“We are at the base-building period for the next bull market,” Mobius told Bloomberg while attending a conference in Indonesia. “What I see happening is perhaps this continuing till the end of the year, and then a breakout.”

Many of these emerging and developing economies are on the cusp of breaking out, but are being held back by the drought of others. The ultimate catalysts that set them loose will be falling interest rates and easing inflation, Mobius said.

In the first week of May, about $4 billion was pumped into emerging-market equity funds. It was the largest weekly inflow since December and the eighth-largest on record, MarketWatch reported. Most of that went into ETFs, and long-term positions at that.

Not coincidentally, the specific countries seeing the largest inflows are represented in Harvard’s portfolio. Brazil posted its second-largest weekly inflow on record. China, India and Russia also saw huge gains, MarketWatch reported.

Those four markets – Brazil, Russia, India and China – comprise the so-called “BRIC” economies of the world.

Emerging Market ETF Plays

How to capitalize on emerging markets reemergence from recession depends on your risk tolerance. And risk levels can vary by country and investment sector.

Carl Delfeld, head of global investment advisory firm Chartwell Partners, noted that while the U.S. financial sector is the chief culprit of the global financial crisis, some healthy-capital foreign banks are currently very nicely positioned because they didn’t get involved in the bad U.S. debt, and because they have the fastest-growing growing base of consumers in the fastest-growing markets.

And a good way to play this trend could be the soon-to-be available Global Shares Dow Jones Emerging Markets Financial Titans ETF, Delfeld writes in the May 25 issue of Forbes magazine. Of the fund’s top-10 holdings, four are China-based, three Brazil and two India.

More speculative investors might be interested in another new ETF, the WisdomTree Dreyfus Emerging Currency Fund (NYSE: CEW), a basket of 11 equally weighted emerging market currencies that are rebalanced every quarter.

The currencies in the fund are the Brazilian real, Mexican peso, Chilean peso, Israel shekel, Turkish lira, Polish zloty, Chinese yuan, South Korean won, Taiwan dollar, Indian rupee and the South African rand.

For more general plays on specific countries, Harvard’s list of new investments could be a good starting point.

Money Morning Contributing EditorHoracio Marquez recommended iShares MSCI Brazil Index (EWZ) in his popular “Buy, Sell or Hold” column last October. It’s also one of the five emerging market ETFs that Money Morning’s Martin Hutchinson recommended earlier this year. Others included iShares MSCI Chile Investable Index (ECH), iShares MSCI Taiwan Index (EWT) and iShares MSCI Singapore Index (EWS).

Source: Looking For the Next Global Profit Play? Take a Look at These Emerging Market ETFs

The problem I have with this dogmatic definition of a bear market rally is the following: Assuming (and this isn’t a forecast, since I really haven’t the foggiest idea where stock markets will be in six or 12 months’ time) the S&P 500 moved up to 1350 and then declined to 500, as an investor should you care if the move to 1350 — a 100% gain! — was a bear market rally?

My impression is that investors’ fixation on the recent rally being a bear market rally has actually kept most investors on the sidelines and hoarding cash. Now, put yourself in the shoes of a fund manager who, in the last 18 months, has lost 50% of his clients’ money and missed the recent rally (34% for the S&P 500). What is he likely to do? I would think that he would be inclined to purchase equities as they correct the sharp advance since early March, especially as the economic news in the near term becomes less negative.

Based on our conversations with numerous managers in recent weeks, we believe that most quantitative managers’ portfolios were not positioned in expectation of a rally. Of the nearly 80 managers we have talked to, only one manager said they were up since March 9th and the clear majority admitted to being notably down or stopped out on their positions. These managers were both long-only and long-short quant managers using market neutral and non-market neutral strategies, sector neutral and non-sector neutral strategies, longer term and intermediate-term holding periods. It is fair to say that just about everyone is bewildered and trying to understand when this rally will end.

Another factor to consider is that there has been a significant improvement in the technical position of world stock markets. In the US the largest number of new 12-month lows was reached in October. At the November 21 low at 741 for the S&P 500, the number of new lows had already contracted, and even more so at the index’s March 6 low at 666. Also, market breadth and the number of stocks moving above their 200-day moving averages have taken a decisive turn for the better, indicating that the stock market advance is broadening and that the number of stocks that have bottomed out (at least in the intermediate turn) is expanding.

I have explained repeatedly in the past that if a government is really determined to try and postpone an inevitable collapse by “printing money” in order to lift or support asset prices, it can be done. However, the result of such a monetary policy is to lower the purchasing power of its paper currency, with catastrophic long-term consequences for its economic and financial volatility.

It forces individuals and institutions with cash to buy something…anything. So, this cash is channeled into gold and/or different paper currencies, commodities, equities, bonds, real estate, and consumer goods and services, but obviously with different intensities and at different times. For instance, at some times, such as in 2008, more money will be allocated to gold; while at other times, such as since early March, more money will flow into equities and industrial commodities. It is well understood that these money flows are driven largely by speculative activity (and more than a little dose of manipulation). The result in all asset markets is very high volatility and price fluctuations that don’t appear to make any sense to most market participants and observers who don’t understand the new rules of the investment game that were brought about by “money printing”.

This is where we are today, irrespective of whether or not you and I like policies of “quantitative easing, massive bailouts, and frightening fiscal deficits” and their long-term consequences! Another positive factor for stock markets is that a large number of Asian stock markets and individual stocks in the region had already bottomed out in October and November of 2008 and didn’t confirm the new low in the S&P in early March.

In Asia, the Taiwan and Shanghai indexes, and Korea’s Kospi Index, are all up by more than 50% from their late October 2008 lows. (The Shenzhen Index is up 90%.) But it is not only the Asian equity markets that have outperformed the US and Western European markets over the last few months; since late January 2009, the RTS Russian Index is up 66% and the MSCI Emerging Market ETF is up by 55% from its early November 2008 low.

This is not to say that the global economy is about to embark on a strong and sustainable growth phase. It also doesn’t mean that a new bull market in global equities à la 1982– 2000 has begun. But I think that, at least in nominal terms (inflation-adjusted), the global printing presses being run by the world’s central banks and fiscal deficits have begun to impact asset prices positively. Therefore, in the case of resource and mining stocks, as well as Asian equities (and, for that matter, most emerging and other stock markets around the globe), the lows thatwere reached between October and March of this year are likely to hold — that is, for now.

The markets that have the highest probability of having made major longer-term lows are resource-related equities, emerging markets, and Japan. Conversely, the asset market that has the highest probability of having made a secular high (such as Japan in 1989, or the Nasdaq in March 2000) is the US long-term government bond market.

Despite a still-weakening economy and massive quantitative easing, long-term bond yields appear to be on the verge of breaking out on the upside. I have listed again below all the equity recommendations I have made since December 2008. Some of these equities have already moved up substantially (resource and mining companies, in particular) and, therefore, I would only buy most of these recommendations on a correction.

In addition, a number of BRIC and other (mostly emerging market) closed-end country funds and ETS were recommended, such as Brazil ETF (EWZ), the Templeton Russia Fund (TRF), the Greater China Fund (GCH), the Asia Pacific Fund (APB), Taiwan iShares (EWT), the Japanese ETF (EWJ), the Japan Smaller Capitalization Fund (JOF), the Morgan Stanley India Fund (IIF), the Turkish Fund (TKF), and the MSCI Emerging Market ETF (EEM).

In the US, late last year we recommended buying the iShares iBox Investment Grade Corporate Bond (LQD) and Nicholas Applegate Convertible & Income Fund (NCV), while earlier this year we recommended the accumulation of stocks of high-tech companies such as Cisco (CSCO), Intel (INTL), Oracle (ORCL), and Yahoo (YHOO). More recently, we recommended beaten-down insurance companies and financials as rebound candidates, including Leucadia National (LUK) and CNA Financial (CNA), Citigroup (C), the BKX, the Financial Bull 3x Shares (FAS), and the Financials Select Sector SPDR.

The market’s advance had been broadening and that more and more groups such as airlines (AMR), homebuilders (TOL, CTX, HOV), and cyclicals such as Dow Chemical (DOW), International Paper (IP), and Alcoa (AA) are showing signs of having bottomed out. Among commodities, I am particularly intrigued by natural gas. There are natural gas ETFs (UNG, GAZ), but costs are high. A better way is probably just to buy future contracts, or Pioneer Natural Resources (PXD) or the First Trust ISE Revere Natural Gas Index Fund (FCG).

Source: What to Buy…or Not Buy

Unfortunately, there’s one sobering conclusion many investors have so far failed to reach: With grossly over-stimulative monetary and fiscal policies at play, most countries will find it very difficult to recover.

Fortunately, a few well-run countries avoided the fallout from the U.S. housing debacle – as well as the fiscal-and-monetary-stimulus mess that followed. And although they have been badly stung by the slump in world trade, these countries are poised to recover with a satisfying bounce.

One such country is Taiwan, and global markets may be just starting to realize this.

A Backgrounder on a Potential Winner

Because its banks were not active in the United States, Taiwan didn’t suffer directly from the collapse in the U.S. housing market. Taiwan also has not suffered from the typical money-tightening consequence of the financial crisis in the world’s emerging markets; it has no need of foreign bank credit, since it consistently runs a payments surplus and has $300 billion in currency reserves.

However, like all the East Asian countries involved in the supply chain to U.S. consumers, Taiwan did suffer a huge decline in exports in the first three months of 2009; its exports dropped more than 35% in the first quarter – less severe than Japan’s drop, but more than those in Korea and China.

I wrote on this some weeks ago, guessing that the export problem was not fundamental, but simply due to United States de-stocking and the difficulties of obtaining trade finance.

The first-quarter U.S. gross domestic product (GDP) figures published April 29 show that this supposition was correct. U.S. inventories dropped a huge $109 billion; the drop in inventories was by itself responsible for 46% of the 6.1% annual rate of decline in U.S. GDP.

Taiwan’s trade figures for March were already improving somewhat, suggesting that this problem might be alleviating. Recent statements by the major Taiwanese semiconductor companies – firms that are intimately involved in the East Asia/U.S. supply chain – confirm that this transformation is, indeed, taking place. Thus, the Taiwanese economy is likely to at least experience a short-term bounce.

Taiwan’s prospects for sustained recovery are better than many Western countries, because its leadership didn’t panic and jump into the fiscal and monetary policies that are almost certain to cause long-term damage in the countries where leaders opted for such strategies.

In fact, the panel of forecasters from The Economist predicted that Taiwan’s fiscal deficit to be only 5% of GDP for the current fiscal year – less than half the deficit projected for the United States and Great Britain, for example. Its short-term interest rates are below 1%, but it currently has no inflation. And the Taiwanese dollar has declined by 10% against the U.S. dollar since September, making Taiwanese exports more competitive.

The Economist panel expects the Taiwanese economy to shrink by 6.5% in 2009, but that is certainly far too conservative, given the signs of export recovery.

Profiting from the “Other” China

Investors have always worried about Taiwan’s relations with The People’s Republic of China, which claims it as part of the mainland country. However, since the election of the Kuomintang president Ma Ying-jeou last year, relations between Taiwan and Mainland China have improved markedly.

Investors who are aware of Taiwan’s potential have long labeled it as “The Other China.”

On Thursday, China Mobile Ltd. (NYSE ADR: CHL) – China’s largest cellular telephone company – announced plans to invest in Taiwan’s Far EasTone Telecommunications Co. Ltd., a first for Chinese investment in Taiwan (Taiwan has huge investments in China), suggesting that trade relations are no longer cool – but are, in fact, warm.

Three possible avenues into Taiwan seem attractive:

• The Taiwanese exchange-traded fund (ETF).
• And the two largest producers of semiconductors, an industry central to Taiwan’s growth that should benefit from the recent weakness in the Taiwan dollar. In this context, it is notable that the SEMI book-to-bill ratio for the U.S. semiconductor increased sharply in March to 0.61, with the three-month average of orders up 9%. That’s still not a strong number, but it’s moving in the right direction, and matches recent optimism from Taiwan’s manufacturers.

Let’s look at these three Taiwan profit plays:

The iShares MSCI Taiwan Index ETF (NYSE: EWT) is clearly an efficient way to invest in Taiwan; it has risen recently, but is currently trading at a reasonable 13 times earnings.

Taiwan Semiconductor Manufacturing Co. Ltd. (NYSE ADR: TSM) is Taiwan’s largest semiconductor manufacturer. It just reported a tiny first quarter profit on a 54% decrease in sales, but said that its order book was very strong and noted that it expected a sharp rebound in sales and earnings in the second half of 2009.

United Microelectronics Corp. (NYSE ADR: UMC) reported a loss for the first quarter, but just invested $285 million to acquire Chinese semiconductor manufacturer HeJian Technology (Suzhou) Co. Ltd., giving it a substantial foothold in that rapidly growing market. UMC expects a profit in the second quarter and rapid recovery thereafter; it has a strong balance sheet and its free cash flow was positive even in the loss-making first quarter.

Source: Three Ways to Profit As Taiwan Rebounds From the Financial Crisis

This from Money Morning:

If you’re an emerging-markets investor, and you happened to peruse the study that the Institute for International Finance released this week, you must’ve experienced alarm – if not panic. The IIF expects the inflow of private funds into these markets to plunge to only $165 billion this year – an amount that’s just 18% of the $929 billion that flowed into these very same markets in 2007.

For investors, the message is clear: We’d better concentrate on those emerging markets whose inhabitants have hefty piggybanks of their own.

The details of the investment slowdown are as alarming as the headline. Bank loans to emerging markets will decline from an inflow of $165 billion to a net outflow of $61 billion. Private non-bank debt investment will decline from $125 billion to $31 billion, and even official flows will decline from $41 billion to $29 billion.

Net portfolio equity investment will remain negative, though the outflow will be only $3 billion compared to 2008’s $89 billion. Only direct foreign investment will increase, rising 12% from 2008 to $195 billion.

In terms of regions, emerging Europe will suffer worst, with inflows plummeting from 13% of regional gross domestic product (GDP) in 2007 to just 1% in 2009. Latin America will also suffer, with inflows dropping from 11% of regional GDP to 3%.

Overall, inflows to emerging markets will drop by 5.8% of emerging market GDP between 2007 and 2009 – almost double the declines of the late 1990s crisis (3.7% of emerging market GDP) and early 1980s (3.2%). Emerging market cash flows will also be affected by the need to repay $223 billion of private market debt this year.

This will cause a reordering of the economic pecking order in the emerging markets.

From 2003 to 2007, the availability of natural resources and/or cheap labor was more important than high foreign reserves or a big domestic savings base, so Argentina (natural resources) and emerging Europe (cheap labor, relative to the EU average) did well. In 2009, access to capital will be more critical than either of those other strengths. Countries without a large domestic savings base, or with substantial balance-of-payments deficits, or with low foreign exchange reserves, are likely to suffer badly.

Many emerging Europe countries have balance of payments deficits exceeding 10% of GDP so will suffer badly. Within that region, the Baltic states – fairly uncorrupt and friendly to foreign investment – will do much better than Romania and Bulgaria, which are both corrupt and xenophobic.

In Latin America, Brazil has an excellent domestic savings base, which it has been nurtured by policies that keep interest rates much higher than the rate of inflation. It is also quite friendly to foreign direct investment. Hence, in spite of its high foreign debt, Brazil should do fine.

Conversely, Mexico has a lower domestic savings base, relies heavily on remittances from Mexicans in the United States (which have declined sharply) and is quite hostile to foreign investment, particularly in the energy sector. Hence it is likely to have a tough year.

In Asia, China – with huge domestic savings, $1.95 trillion in foreign exchange reserves, and low foreign borrowing – will do fine. Conversely, India’s high domestic savings are offset by a profligate government, which runs a wasteful deficit of more than 10% of GDP. Hence India is quite reliant on foreign borrowing, and is likely to have problems.

For investors, the message is clear. Our emerging markets investments must be concentrated in countries that will not be badly affected by the decline in foreign capital inflows, preferably where domestic savers have piggybanks that are large enough to fund expansion locally. In particular, without delving into particular stocks, the following country-specific exchange traded funds (ETFs) are worth looking at:

• The iShares MSCI Brazil Index (NYSE:EWZ) has net assets of $3.4 billion, a Price/Earnings (P/E) ratio of 7.0, and a dividend yield of 6%. Money Morning Contributing Editor Horacio Marquez recently recommended this Brazilian ETF in this weekly “Buy, Sell or Hold” series.
• The iShares MSCI Chile investable index (NYSE:ECH) has net assets of only $112 million and a P/E of 13. However, Chile is interesting because it built up a reserve fund of $21 billion (12% of GDP) during the years when copper prices were high – it is thus not dependent on foreign-fund inflows.
• The iShares FTSE/Xinhua China 25 Index (NYSE:FXI) invests in the 25 largest Chinese companies. Net assets are $5.9 billion, its P/E ratio 10, and its yield 2.7%.
• The iShares MSCI Taiwan Index (NYSE:EWT) has net assets of $1.3 billion, a P/E of 9 and a yield of 8%. Taiwan is highly liquid, with large reserves, a high savings rate and almost no foreign debt
• The iShares MSCI Singapore Index (NYSE:EWS) has net assets of $800 million, a P/E of 9 and a yield of 8%. Like Taiwan, Singapore is highly liquid, with large foreign exchange reserves and little debt. Taiwanese and Singapore companies may indeed benefit from the liquidity crunch by finding attractive investment opportunities in regional cash-short emerging markets with high growth potential, such as Vietnam.

Source: The Five Most Promising Emerging Markets ETFs for 2009

 Shadow Stocks: The Low-Risk, High-Profit Way to Play the Leading Global Trends

By Horacio Marquez

Most investors know them as “exchange traded funds,” or ETFs. But we refer to them as “shadow stocks,” and with good reason.

We’ve labeled them as shadow stocks because they “shadow” the performance of a particular market, index, or sector. They’re baskets of stocks that – like mutual funds – enable you to buy or sell a portfolio of securities in a single purchase.

Unlike mutual funds, however, you can trade shadow stocks just as you would an individual stock: You can buy and sell them at intraday prices on U.S. stock exchanges, you can buy options on them, and you can even sell them “short.”

These relatively new, highly focused forms of mutual funds offer investors a diversified way to play economic sectors, global financial trends, market events and other so-called “special situations.”

But no matter how you label them – whether you refer to them as shadow stocks or as ETFs – one thing is certain: For individual investors, shadow stocks are the most-innovative, and most-powerful investment vehicle to hit the financial markets in at least two decades.

There are three key reasons why this is true. Shadow stocks:

• Offer a risk/reward profile that’s much better than either individual stocks or regular mutual funds can offer.
• Provide a way to make investment plays that would otherwise be out of reach.
• Give you terrific diversification and liquidity, offering significant safety.

Now that we’ve listed these important benefits, let’s look at each one in more detail.

Shadow Stocks: The Super Sector Selectors

If you want to succeed as an investor, there’s one key fact you need to understand. It’s so important, in fact, that in my research, writing and presentations I refer to it as Shadow Stock Profit Secret No. 1:

• It’s not the stock you buy, it’s the sector you play.

I’m always stunned by how few people actually are aware of this basic fact. But study after study bears this out: More than 50% of any gain an investor realizes in an individual stock is due to the sector it’s in, not the stock itself.

Indeed, because they are so well focused, shadow stocks (or ETFs), allow you to play the sector, theme, or global trend that will generate most of your gain.

What’s more, since they are a “fund,” shadow stocks offer risk diversification that individual stocks could never offer. If you identify a great global trend to play for a profit – but pick the wrong stock (it has an earnings disappointment, a liability lawsuit or gets caught up in a financial crisis) – you could actually incur major losses, despite having chosen a winning trend.

Putting Profits Back in Reach

That brings us to Shadow Stock Profit Secret No. 2:

• Shadow Stocks Put the “Out of Reach” Back Within Your Reach.

Here at Money Morning last year, we uncovered a fascinating investment opportunity – only to realize there was no direct way to profit from it.

Our global money-flow analysis pointed to Taiwan as a lucrative long-term investment opportunity. Drilling down, we uncovered a terrific profit play: Hon Hai Precision Industry Co. Ltd., a Taiwan-based company that manufactures all three of the hot new video game consoles that have been duking it out in the $10 billion worldwide video-gaming market. With those gaming systems, we’re talking, of course, about:

• Sony Corp.’s (ADR: SNE) PlayStation 3
• Microsoft Corp.’s (MSFT) X-Box360
• And Nintendo Co. Ltd.’s (OTC ADR: NTDOY) Wii

Hon Hai isn’t some little wannabe: As the maker of every global gizmo from Hewlett-Packard Co. (HPQ) PCs to the hot new Apple Inc. (AAPL) iPhone, Hon Hai has grown into a global leader so dominant that BusinessWeek magazine labeled it as an “earnings machine.” In fact, it’s now the biggest electronics manufacturer on the planet.

Sounds like a great investment, right?

Wrong.

Unfortunately, Hon Hai wasn’t registered with the U.S. Securities and Exchange Commission, meaning its shares weren’t available to U.S. retailer investors.

We didn’t give up, of course. While we couldn’t get around the SEC regulations, we did find another investment that held a big stake in Hon Hai – along with dozens of other Taiwanese companies with the same kind of potential. It was a “shadow stock” – an ETF called the iShares MSCI Taiwan Index (EWT). And Hon Hai’s Taiwanese shares were the fund’s largest holding.

Three Stocks to Double Your Money in the Next Asian Market Bubble

Tom Dyson

Flights between China and Taiwan start this weekend. The first plane will fly from Taiwan to China on Saturday morning and then return one hour later. China Airlines, the largest Taiwanese carrier, will operate the flight.

Saturday’s flight will mark the first direct scheduled flight between China and Taiwan in 59 years.

In 1949, Taiwan banned direct flights with China. Taiwan used to be part of China. But in the 1940s, China had a communist revolution. The losers of the war – the business and intellectual elite – fled to Taiwan and broke ties with mainland China. Officially, China and Taiwan are still at war.

In March, a new president won power in Taiwan. This new president wants to mend Taiwan’s relationship with China… and eventually unify the two countries. This was the basis of his election platform. Restoring transport links between the two countries was his first step.

Starting on Saturday, 36 flights will connect Taiwan and China every weekend. Several airlines – from both Taiwan and China – will fly between different Chinese and Taiwanese airports.

Here’s the thing: When the losers of the revolution in China came to Taiwan in 1949, they took over Taiwan by force, imposed martial law, banned all political parties except their own, restricted the press, and put large tariffs on foreign imports and luxury goods. Then they built an aggressive export economy like Japan’s.

The aim of these policies was to make Taiwan rich. And they worked. By 1987, Taiwan had the fourth-largest stash of foreign exchange reserves in the world, after the U.S., France, and Japan. Taiwan had almost as much foreign reserves as Japan… even though Japan’s population was six times larger. In 1987, the typical citizen of Taiwan saved 31.2% of disposable income (vs. 16.6% in Japan and 3.2% in the U.S.).

In 1987, a new president won power in Taiwan… the first native Taiwanese to head the government. The new president started loosening regulations. He encouraged citizens to buy luxury American goods. He freed the press. He allowed opposition political parties to compete for power. He let Taiwanese citizens send money abroad. And he let Taiwanese citizens travel to China to visit relatives… for the first time since the revolution.

The Taiwanese stock market loved these new policies. Between 1987 and 1990, Taiwan had one of the greatest stock market bubbles in history. Taiwan’s market rose from 1,100 to 12,054… a gain of 991%… and the Taiwanese currency rose another 40%. Foreign investors would have made 14 times their money in just three years by investing in Taiwan.

Now I think we’re about to see another huge rally in Taiwanese stocks. Since 1990, Taiwan’s stock market has been the worst-performing major stock market in the world, except for Japan. Today the index is at 7,523. That’s a fall of 38% from 1990 levels.

The new president is freeing up regulations between Taiwan and China. Transport comes first. Capital regulations will come next. Taiwan’s new president has said he wants to help Taiwan’s financial industry go to the mainland. Hong Kong’s stock market rose 55% in 10 weeks last year after Hong Kong opened its markets to Chinese investors in August 2007.

I don’t think the Taiwanese stock market will rise 990% again… but I do think it’ll double over the next couple of years. The Taiwan ETF (NYSE: EWT) is the easiest way to invest in Taiwan. It pays a 2.75% dividend.

There are also two Taiwan closed-end funds: The Taiwan Fund (NYSE: TWN) trades at an 8% discount and pays a 2.75% dividend. The Taiwan Greater China Fund (NYSE: TFC) trades at a 10% discount and pays a 0.16% dividend.

Good investing,

Tom

P.S. I recommended a Taiwanese stock in the most recent issue of my investment advisory, The 12% Letter. It’s the largest technology hedge fund in Taiwan and pays a 6.3% dividend.

Source: Three Stocks to Double Your Money in the Next Asian Market Bubble

In addition Mr. Ma is helping to ease tensions with China. Some of the changes are already being seen. Direct flights will be allowed between China and Taiwan which will stimulate tourism and business.

And Taiwan companies will have a jump start at rebuilding their investments in China.

Up to this point there has been a 40% investment ceiling but this is set to change. The new government is taking steps to remove this and banks too may also be allowed to take a 20% stake in Chinese lenders.

The iShares MSCI Taiwan Index Fund (EWT: NYSE) is composed of a basket of stocks in the industrial sectors, material, telecomm and information technology. The semiconductor sector makes up close to 50% of the index and most of this manufacturing takes place in China.

EWT is an indirect and cheap way to play the China growth story. It has lagged behind most of the other Asian ETFs over a five-year period and is now ready to move higher as it catches up with the rest of Asia.

Sally Limantour

Editor, Taipan

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