Taiwan bucks east Asia’s regional trend

Taiwan is bucking the Asian slowdown. The island’s economy grew by 2.9% year-on-year in the third quarter, say Chinmei Sung and Samson Ellis on Bloomberg. That is the fastest pace since early 2018 and stands in “stark contrast” to weakness elsewhere in east Asia: South Korea is on course for its “weakest growth since the global financial crisis” and Japan has slowed sharply. Hong Kong fell into recession in the third quarter.
A small, self-governing island that Beijing regards as a renegade province, Taiwan plays an outsize role in emerging Asia. The country’s stocks make up 16.4% of the MSCI Emerging Markets Asia index, third behind mainland China and South Korea.

The Taiex stock index is up 21% so far this year and looks on course for its “best year in a decade”, says Cindy Wang on Bloomberg. “Foreign investors have poured $6.6bn into Taiwan-listed equities” so far this year. That makes it second only to India as an Asian investment destination.
Wait and see
The strong growth has been driven by two key factors, writes Huileng Tan for CNBC. First is a cyclical upturn in electronics demand. New smartphone launches ahead of Christmas have particularly benefited local giant Foxconn, which assembles iPhones for Apple. Second, the US-China trade war has promoted “reshoring” of production as companies shift supply chains away from mainland China in order to avoid American tariffs.
Taiwan’s economy is the beneficiary of “favourable structural and cyclical trends”, says Vincent Tsui for Gavekal Research. There are signs that Asia’s export decline is finally bottoming out. That means an upturn for the island’s all-important electronics industry could be around the corner.
Bears used to predict that the local manufacturing base would be “hollowed out” by relocation to lower cost destinations in Asia, but rising wages in China have enabled local semiconductor manufacturers to maintain their competitive edge. Taiwanese stocks look poised to outperform Asian peers.
A 4% dividend yield makes Taiwan one of the most attractive choices in Asia for income seekers. Yet value investors may baulk at the market’s rich valuation. On a cyclically adjusted price/earnings yield of 21.1, Taiwan is notably more expensive than other markets in the region. Tsui says that investors could look to buy in on market dips.
China’s communists regard the Taiwanese president, Tsai Ing-wen, and her pro-independence supporters as “beyond the pale”, so cross-strait relations could be in for a bumpy ride if she is re-elected next year. “Bellicose rhetoric” and economic countermeasures would cause market jitters, but investors could find “an attractive buying opportunity”.