Time to Invest in Taiwan? Maybe, Maybe Not
It sure feels like Taiwan has been flying under the radar as of late.
Even as Chinese stocks have rebounded over the past several months, Taiwanese issues have been stagnant. Over that time, the iShares FTSE China 25 Index Fund (NYSEARCA:FXI) is up 5% while the iShares MSCI Taiwan Index Fund (NYSEARCA:EWT) is up just 1.2%.
Part of the reason for the lethargy of EWT and the names it tracks is weakness in the technology sector, which accounts for nearly 56% of EWT's weight.
"In the semiconductor business, for example, inventory levels have surged recently, resulting in lower capacity utilization rates, which are generally associated with less pricing power for companies, and posing near-term headwinds," iShares Global Chief Investment Strategist Russ Koesterich said in a note. "Meanwhile, weak global capital expenditures and sagging consumer demand adds pressure on the personal computer market."
Weakness in the semiconductor sub-sector is bad news for EWT because the ETF is home to several chip names. Taiwan Semiconductor (NYSE:TSM) is the fund's largest holding with a weight of over 20% . Inflation has also been a problem.
"For the past three months, headline inflation measures have been persistently above the 2% inflation target set by the central bank, a result of higher fuel, electricity, and food prices," Koesterich said in reducing his rating on Taiwan to Neutral from Overweight.
Bolstering the bear case for Taiwan is a premium market valuation. EWT has a price-to-earnings ratio of 20.5 and a price-to-book ratio of 2.32. That implies Taiwan is far pricier than China and the broader emerging markets universe as measured by EEM.
With the global economy still tepid at best, Taiwan's dependence on exports has been exposed. However, there is another side to the story. The country was recently 16th-best country for business by Forbes. The International Monetary Fund is projecting Taiwanese GDP growth of 3.9% next year, a stark improvement from the 1.05% growth the government expects this year.
Investors looking for Taiwan exposure without making a full commitment as required by EWT should consider the following ETFs.
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