Taiwanese Presidential Elections Being Held Today

As I mentioned in my January 30th post, I believe that the ' China friendly' Kuomintang party, after their sweeping victory in the legislative elections, will win the Presidential elections. Once this occurs it is likely that we will see the new leadership attempt to open direct ties with China allowing tourists, and more importantly investments, to flow freely between the countries. Lets be clear though, the Kuomintang party is not calling for reunification, just for an improvement in ties. With this in mind it will be important to monitor the new officials progress in negotiating with the Chinese government. However, after spending some time on the ground in Taiwan and gaining a rough gauge on local sentiment, I believe people are ready for change, especially change that brings stronger economic growth and more jobs. Thus, we think it is more likely than not the Kuomintang will be successful at reopening ties with China. We anticipate that this will have a substantial positive impact on the Taiwanese economy. I still believe the best way to leverage this potential is through the ETF 'EWT'. In fact we have realized we are not alone in this assumption. Since we first recommended looking at EWZ on Jan 30th it has experienced near 20% gains outperforming the overall MSCI EM ETF 'EEM' by around 23%. This performance is surely on the back of the expected improvement in ties with China and the potential catch-up effect we could see in the Taiwanese economy.

Take a look at the charts below for more details:

Taiwan ETF (EWT) and Overall EM ETF (EEM) rebased to 100: EWT has been significantly underperforming the EM benchmark

Source: BBerg

But that has changed... EWT has begun to outperform EEM and we expect this trend to continue as long as ties with China are improved

Source: BBerg