A “Change” Election—in Taiwan

02/20/2008 12:00 am EST

Focus: GLOBAL

Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

Carlton Delfeld, editor of Chartwell Advisor Global ETF Report, thinks Taiwan’s upcoming election could mark a huge, positive change in its relation to the mainland.

I added Taiwan to Asian and international portfolios based on changes in leadership, an anticipated [opposition electoral] victory in March, and increase in trade ties with mainland China. The semiconductor industry pullback countered these positive trends, but the neglected iShares MSCI Taiwan Index ETF (NYSEArca: EWT) is now priced at historically attractive valuations. (It closed Tuesday below $14.50, about 20% off its 52-week high—Editor.)

Ma Ying-jeou, the candidate of Taiwan’s opposition Kuomintang (KMT), received a strong boost for his presidential bid after his party won parliamentary elections by a landslide [a few weeks ago.]

The KMT’s victory pushed shares sharply higher as investors gained confidence that tension with China will recede and the island’s next president, to be elected in March, could move to greatly deregulate cross-strait economic ties. (Tensions had risen in recent years as President Chen Shui-bian made several gestures towards complete Taiwanese independence, which China’s government vehemently opposes—Editor.)

Exceeding even its own most optimistic forecasts, the KMT won 81 of 113 seats in the new legislature, giving it the power to dominate parliament and dramatically reducing the ruling Democratic Progressive party from the biggest legislative caucus to an almost insignificant faction with just 27 seats.

This was a fatal blow to Chen Shui-bian, who resigned as DPP chairman. “This election is the worst defeat since the founding of our party,” he said, [urging party members] to unite behind the leadership of Frank Hsieh, our presidential candidate.”

Mr. Hsieh will take over the reigns of the party and will have a chance to do what he has long wanted to do—move the DPP to the middle ground. Mr. Hsieh has long argued that the party needs to address economic, social, and environmental issues to attract middle-class voters. He has only until March 22nd to convince voters that he is the agent of change to open up more economic opportunities with China while maintaining Taiwan’s autonomy. Sound familiar?

No matter which side wins, the money that Taiwanese have taken offshore—estimated by Morgan Stanley to be as much as a $207-billion capital outflow between 2000 and the end of the third quarter in 2007—should start to come home. This is a lot of money relative to the $625-billion market value of the Taiwanese stock market.

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