Taiwan May Be Too Hot to Handle Now
To invest in China, Americans are usually told, buy Hong Kong stocks. Rarely mentioned is another option: the Taiwan market.
Just as Hong Kong companies are helping to nurture China’s economic boom, Taiwanese companies also have been actively investing in mainland ventures.
Last year alone, Taiwanese businesses committed $3.4 billion to more than 3,700 mainland enterprises, according to China’s Xinhua news agency.
So far this year, Taiwan stocks have responded powerfully to optimism about growing mainland business ties, as well as to the ascension of a new pro-business Taiwanese government. Most recently, expectations of a drop in interest rates have pumped up share prices.
While Hong Kong’s stock market has drawn global attention with its 23% rise so far this year, Taiwan’s market has been much hotter: Taipei’s major market index has surged 39%, from 3,377.06 at year’s end to 4,678.14 now.
But in the midst of this rally, one veteran is urging caution: Danny Chan, who manages the R.O.C. Taiwan Fund, a closed-end investment fund traded on the New York Stock Exchange.
Over the next five to 10 years, there’s likely to be a handsome China dividend for Taiwan companies, Chan says. But in the short run, he is bearish on the market’s prospects. And because of his credentials as one of the savviest Taiwan fund mangers in recent years, Chan’s words carry weight.
His $250-million fund, which he manages from Taipei for International Investment Trust Co., is only 30% invested in Taiwanese stocks today. The bulk of the assets are in money market instruments.
In fact, Chan was bearish throughout the Taiwan market’s first-quarter surge. As a result, his fund’s per-share net asset value has risen only 6% this year.
But his long-term prowess at market timing should give his shareholders comfort. Chan moved to the R.O.C. Taiwan Fund last summer after nearly six years managing its chief rival, Fidelity Investments’ Taiwan Fund. The Fidelity fund’s five-year total return of 133% through March 31 was largely Chan’s work.
That five-year period included the Taiwan market’s stupendous 1990 crash, when the major market index plummeted 80% in six months, from 12,495.34 to 2,560.47.
Chan, a third-generation Chinese with an unmistakable down-under accent (he was raised in New Zealand), visited clients in Los Angeles last week to explain his long-term optimism/short-term pessimism on the Taiwan market. Because foreigners’ direct access to the market is restricted, closed-end funds such as Chan’s are virtually the only way for U.S. investors to buy in.
A few points Chan made about investing in Taiwan stocks:
* The market’s reputation as a casino is “not an image--it’s a fact.” Individual Taiwanese play stocks almost exclusively for short-term gains, Chan says. “They act on rumors and tips rather than on fundamental analysis,” he says. Low broker commissions encourage trading.
The market’s extraordinarily volatile nature makes it impossible for a portfolio manager to simply buy and hold, Chan says, because stocks can become excessively overvalued--or undervalued--in such short periods. So a disciplined timing strategy is key to successful investing in Taiwan, he maintains.
* Though it’s the second largest of Asia’s emerging markets in total capitalization ($147 billion), Taiwan has only 261 listed firms--fewer than such smaller markets as Thailand and Malaysia. Thus, money is more concentrated in Taiwan stocks, adding to volatility.
* Trading is routinely skewed by professional stock manipulators. The rally so far this year, Chan says, has been driven by a handful of financial stocks, the speculators’ favorites for now.
The gains in financial stocks have pushed those issues to outrageous valuations relative to their earnings potential, Chan says. That, in turn, has driven the overall market’s price-to-earnings ratio to 36 currently, based on estimated 1993 earnings.
That makes Taiwanese stocks the world’s most expensive, outside Japan.
Mostly because of the high price-to-earnings ratios, Chan believes the market is ripe for one of its classic plunges. So as prices have risen he has pared back his portfolio, retaining only the more reasonably valued stocks that are plays on his favorite long-term Taiwan themes, he says.
One of those themes is infrastructure spending. The Taiwanese government has committed to spending $300 billion over six years to enhance the island’s transportation, communications and power-generation systems, as well as to clean up notorious pollution problems, Chan notes. Even if that total is eventually cut in half, he says, “it’ll still be very, very good for the economy.”
Among the largest infrastructure-related holdings in the R.O.C. Taiwan Fund are Asia Cement and Teco Electric & Machinery.
Chan is also sticking with some major Taiwanese beneficiaries of the blossoming ties with the mainland.
Like Japanese firms, he says, many Taiwanese firms are moving basic manufacturing to China to tap the country’s cheap labor. Two such names in his fund are textile maker Formosa Chemical & Fiber and China Motor, a producer of light pickup trucks.
Finally, Chan notes, even without China ties, Taiwan remains a fast-growing economy in its own right, unburdened by debt at the corporate or consumer level.
That enhances the long-term attractiveness of the stocks, he says.
Though the country’s real annual growth rate has eased to the 5% to 7% range in recent years from 10% to 12% in the late ‘80s, that is a function of increasing emphasis on domestic consumption and a de-emphasis on volatile export businesses.
Given the rising affluence of Taiwan’s 21 million people (who boast a gross savings rate of 28%), the country’s current pace of growth is more sustainable, if not double-digit, Chan says.
With all of those positives, Chan admits that some of his investors might be frustrated that he doesn’t take a more bullish view of the market in the near term. But he makes no apologies.
When Taiwanese stocks are priced this high, he says, “one thing we know from the market’s history is that when they’ve ramped them up quickly, they also ramp them down quickly.”
And while new investors in R.O.C. Taiwan must be willing to trust Chan’s timing instincts, they also have an added incentive if they choose to join him: The fund’s NYSE share price now is below the actual per-share value of the assets.
Because closed-end funds have a set number of shares outstanding, the market may price the shares above or below the fund’s real value, for no apparent reason. Most fund experts advise buying closed-end fund stocks when they drop to a discount to asset value--so that you’re paying, say, 90 cents for $1 worth of assets.
Currently, R.O.C. Taiwan Fund’s net asset value is $9 a share. The stock closed Friday at $8.25, which means it sells at an 8.3% discount to true value.
Comparing ‘Emerging’ Asian Markets While other young Asian stock markets get more publicity, the Taiwan market is the second largest in market capitalization--and also the most expensive, measured by average stock price-to-earnings ratios (based on 1993 estimated earnings).
No. of Avg. daily Market cap. listed traded value 1993 Market (billions) firms (millions) P-E Hong Kong $203 424 $377 11 Taiwan 147 261 1,568 36 S. Korea 106 688 524 18 Malaysia 100 373 186 18 Thailand 58 320 256 14 Singapore 52 192 116 15 Indonesia 22 158 59 15
Source: W.I. Carr, Intl. Investment Trust Co. Data for first quarter 1993.
