Opposition Party Wins Taiwanese Presidential Election

As we expected the opposition candidate Ma Ying-jeou has won the Taiwanese Presidential elections. As we outlined in the entry below this should bode well for Taiwan's economic outlook.

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

Looking for Alpha through Beta

We still believe there are a lot of good values out there on the Global EQ markets. We are anticipating that China will continue to outperform the US, and India may even outperform China. Looking to take advantage of these markets we found the following two ETFs IFN & FXI, for India and China, respectively. Of course the major risk being here any slight decline in the US market will be exacerbated in these markets do to their high betas. Although at times this can be used for your advantage. Take for example last week when the Indian market dropped something like 15% on Monday and Tuesday, this would imply a substantial loss (probably near 5%) for the SP500. Now when the markets opened IFN dropped from trading at around 55 to 48, to catch up with the Indian markets, but when the 5% loss to the SP500 did not materialize (mostly because of the 75bp cut announced before markets opened) the ETF went back to trading around 54. After the Fed announced the 75bp rate cut (the Fed usually makes these surprise announcements at 8:15 am) the US EQ futures market recovered from what was setting up to be a very negative open(-5%). Since the Indian markets were already closed and had experience a devastating loss over the prior two days the ETF, accordingly, opened significantly lower, but since the loss in the US markets didn't substantiate the kind of loss seen in India, it quickly recovered. Meaning if this trade were executed you could have seen gains of over 10% within a couple of hours and in our view with limited risk.

As we have said continually we do not believe the US is going to move into a recession, meaning these markets should continue to outperform. We are also looking into the outlook of the Las Vegas Sands (LVS) before their Feb 4th earnings report, we believe the price has been unjustifiably depressed and earnings could surprise to the upside. This is in no way an investment recommendation, but please feel free to look into the data yourself.

*Sorry for the delay in posts we were in the process of relocating to a nicer space.