During last fall’s Taiwan Business Alliance Conference, 32 foreign companies — including Dell (NASDAQ:DELL), DHL International GmbH and Novartis (NYSE:NVS) — signed letters of intent to invest in Taiwan during the 2011, to the tune of about $1.66 billion.
FDI from the U.S. and offshore monies from its multinationals contribute the largest portion (24%) of foreign funds to Taiwan, followed by Japan (21%).
Sounds good, doesn’t it? A growing economy, significant increase in global trade and a rush to beat down the doors to invest directly in the country by hundreds of foreign firms — what’s not to like?
Consequently, you might ask, “How does an investor get involved in this growth?”
Let me first say that, of course, investing internationally during a slow global recovery is a speculative venture. Europe’s woes — as you’ve seen in the past year — have drastically affected stock markets around the world. And Asian stocks have been some of the worst hit. In fact, MSCI’s EAFE Index (representing developed markets outside of North America, including Europe, Australasia and the Far East) is down 11.3% year-to-date.
So it might not yet be time to jump into Taiwan.
But that time is coming. And the good news is that the Taiwan Stock Exchange is vibrant and modern. Now 50 years old, it has 758 companies listed as of 2010 and enjoys a market cap of $784 billion. The exchange was one of the first global markets to embrace computerized trading, and recently has announced upgrades, to be completed by the end of 2013, that will allow algorithmic or high-frequency trading strategies to align it with other international exchanges.
Also, about 10 Taiwan American Depository Receipts are available to investors.
However, I would recommend that most folks who wish to participate in Taiwan’s growth story concentrate on exchange-traded funds. That way you get diversification and a professional money manager who has some knowledge of the inner workings of the country and its corporations. I just think buying individual stocks in Taiwan right now, for most investors, would be an exercise in great risk thanks to global uncertainty.
More than 60 ETFs include Taiwanese businesses as part of their portfolio of Asian countries, but just a couple that focus exclusively on Taiwanese investments.
- iShares MSCI Taiwan Index (NYSE:EWT) is primarily comprised of shares in large-cap companies, with about 60% of its investments in the tech sector, followed by large holdings in finance and consumer cyclical. Its portfolio includes Taiwan Semiconductor, Hon Hai Precision, HTC Corporation, Chunghwa Telecom and Mediatek Inc. This ETF has had a -20.9% return so far this year but has a three-year return of 18.29%. Morningstar gives EWT a two-star rating.
- IQ Taiwan Small Cap ETF (NYSE:TWON) was created in mid-2010. This ETF focuses on small-cap companies, including Yungtay Engineering Co., Ltd., Kerry TJ Logistics Co Ltd. and Compal Communications Inc. The ETF is down 29.33% year-to-date and is not yet rated by Morningstar.
Both EWT and TWON are extremely volatile, with TWON more so because of its small-cap investments. Most investors would be more suited to owning a more macro-focused ETF that would include Taiwan but also allow you to participate in the tremendous growth across many Asian countries.
Very risk-tolerant investors, however, might want to move EWT and TWON onto their watch lists right now for a possible buy as soon as Europe’s problems cease to be the major headlines of the day. Once global growth becomes less constrained, the Asian economies — particularly Taiwan — might offer some significant gains to the investor who can tolerate a high degree of risk.
As of this writing, Nancy Zambell did not hold a position in any of the aforementioned securities.