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The value in Taiwan: the key may be turning

The key to value investing is not buying cheap. Anyone can do that. It’s buying at a time when the value inside is about to be unlocked.

Greg Bright*

Ideally, this will involve coming across some information that the rest of the market has missed. But, if you believe markets are imperfect and are sometimes slow to react to news, good-value plays can also be plain for everyone to see, particularly for those with a long-term horizon.

One such play which may be about to emerge from the investment doldrums is Taiwan. The Taiwanese sharemarket has gone nowhere for more than 20 years. The index is currently around the same level it was in 1988, making the Japanese market seem almost buoyant by comparison.

There are two main problems with the Taiwanese market for foreign investors: politics and the composition of the index. The first is changing, quite quickly, and the second can be addressed through an absolute returns strategy.

Chris Ruffle, the co-chairman of MC China Ltd, is one of the most experienced and largest foreign investors in China and Greater China, which includes Hong Kong, Macau and Taiwan. A Scot, he first came to China more than 20 years ago, returned and married a Taiwanese woman and settled with their children in Shanghai. MC China is a subsidiary of the Edinburgh-based Martin Currie Investment Management.

Ruffle gave a presentation on Greater China to Martin Currie clients in Edinburgh in July in which he was bullish on the prospects, in particular, for Taiwan. His firm is also sponsoring a Taiwan conference for qualified domestic institutional (QDI) investors, who are allowed to invest offshore.

He says the politics of Taiwan are definitely changing since the election of President Ma Ying-jeou in 2008 and relations with China are improving. Direct flights have started between Taipei and various mainland cities – 340 a week – and the free trade agreement removed tariffs from 130 categories of Chinese products. Taiwanese banks have been given preferential treatment over other foreigners in opening branches in China. Taiwan is also now able to have free trade agreements with other countries.

The next wave, Ruffle says, is where Chinese capital starts to move into Taiwan, with Chinese institutional buying Taiwanese ones, such as financial companies.

Taiwanese tend to have an “edge” in dealing with China, as probably do most Hong Kong companies.

“There are about 22 million people in Taiwan who work hard and speak the same language,” Ruffle says.

With the Taiwanese index, in a similar fashion to the China ‘A’ shares market, the composition is not well reflective of the overall economy. The Taiwanese index is heavily skewed to electronics firms, which makes it more volatile, but these make up less than 10 per cent of GDP.

With his Taiwan Opportunities Fund, Ruffle has a massive underweight to electronics and significant overweights to retail, construction and healthcare.

“Everyone has been underweight Taiwan,” Ruffle says. “It’s a great unseen story.”

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