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

It was cheap. The world’s cheapest stock market at the time. It was hated. Investors were worried the country would be invaded by China. It was in an uptrend. Taiwan’s stock market had just broken out to a new multiyear high.

We love to see all of these conditions for a trade in DailyWealth. When an asset is extraordinarily cheap and hated (or ignored), there’s little risk you’ll lose money. And by waiting for an uptrend before buying, you avoid tying your money up in a dead market for years.

In my Quant Trader service, we bought shares in the Taiwan Fund (TWN) to capitalize on the Taiwan opportunity. The trade worked out wonderfully for a few months… but we stopped out of the position this February as markets around the world plunged. It’s a shame… because this trade has huge potential.

So what do we need to see before jumping back into Taiwan?

The governments of Taiwan and China have been arguing over the jurisdiction of Taiwan for over 50 years. China has vowed to bring Taiwan back under its rule by force if necessary. This political risk is the reason why Taiwan was, and still is, so cheap.

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However, nowadays relations are improving…

The recent election of Ma Ying-jeou brings hope that the two governments will forge new diplomatic and economic ties over the next few years. This is a huge plus for Taiwan. It’s one of the most advanced countries in Asia and home to giant semiconductor and electronics manufacturing industries… so a friendly China will make for a good trading partner.

Another sign I like to see when investing in an Asian market: Legendary investor Jim Rogers has named Taiwan as one of his top spots for new money right now. He believes China and Taiwan will merge their economies and currencies together. This would likely create a huge stock market boom in Taiwan. And boy do these stocks have room to run…

As you can see, Taiwan is still extremely cheap and the long-term uptrend that began in 2003 is still in place. However, the short-term trend is down. The Taiwan Fund is down about 11% over the last month.

The U.S. and China are Taiwan’s two largest trading partners. So, Taiwanese stocks tend to fall alongside China and the U.S.

Again… that’s the short-term picture. Taiwan is a great place to hunt for long-term investments in the Asian economic boom.

The trouble with big stories like Asia is there’s usually too much hype surrounding them to get a great deal on assets. That’s not the case with Taiwan. It’s still cheap, and most folks are ignoring the opportunities. All we need is the uptrend before we stand to make huge returns here.

Good investing,

Ian Davis

P.S. I plan on letting readers of my Quant Trader service know the best time to buy this market. Right now, Quant Trader is only available to members of the exclusive S&A Alliance. Click here to learn about the best deal ever offered on joining this club.