Taiwan has outperformed expectations this year.
The local dollar has strengthened, government bond yields have hit record lows and equities have been on a roll, pumped up by plentiful capital inflows.
Mainly this reflects the fact Taiwan has benefited enormously from the China-US trade war, as firms seek out a suitable alternative manufacturing base to avoid having to pay punitive import tariffs.
Taiwan is well placed to benefit from this. As a leading manufacturer of hi-tech products – such as laptops, tablets, graphic cards, screens and microchips, including those used for ubiquitous smartphones – it thrives on technological change influencing market trends.
The new Apple iPhone 11 is playing an important role supporting manufacturing along the product chain, and the new 5G infrastructure is set to provide another leg-up for the coming years.
Consequently, the economy is benefiting from the growth of exports. Real GDP increased by 2.9% year on year in the third quarter, up from 2.4% in the second quarter, bolstered by this onshoring effect and renewed electronics demand.
Overall, the economy will likely grow by more than 3% this year, with a similar outcome predicted for 2020.
This is supported by increased liquidity from global central banks providing monetary policy stimulus, and the government’s outward-looking southeast Asia policy attracting more tourism from the region to compensate for China imposing travel restrictions.
Taiwan has low inflation, few fiscal problems, a current-account surplus and low unemployment.
However, investors must guard themselves against expecting the good times to continue indefinitely. The economy may be in fine fettle in comparison with other emerging markets in Asia that are struggling, but Taiwan has its own peculiar political risks to consider.
Euromoney’s risk survey underlines this, with Taiwan among the 10 countries in Asia downgraded by risk experts this year, and now showing one of the largest falls over five years, broadly similar to the trends for Japan, South Korea and Malaysia.
Its risk score of 69.1 out of 100 still makes it a fairly benign option, of course, but it is down to 23rd in the global rankings, and is now broadly equivalent in risk to Malta, Iceland, Macau and France. In 2010, Taiwan was 16th.
That doesn’t mean Taiwanese investors are about to be burnt, assuming there is no unforeseen global shock, but it does mean prospective returns are not without a larger degree of risk.
Partly this reflects the uncertainty posed by the elections on January 11.
President Tsai Ing-wen is likely to be returned for a second term on higher approval ratings, linked to the strong economy and the Hong Kong crisis making Taiwanese more wary of Chinese influence.
Tsai has rejected China’s ‘one country, two systems’ approach, and Beijing’s unwillingness to negotiate its way out of the Hong Kong crisis amply demonstrates to many why they must keep faith with an independent leader.
Tsai, for now, is well ahead of her closest challenger Han Kuo-yu – running on the pro-China Kuomintang (KMT) ticket – but that lead possibly reflects more the fact his campaign has been beset by problems.
Moreover, Tsai’s Democratic Progressive Party (DPP) is only narrowly ahead, signalling there is some prospect of tension between executive and legislature if the smaller parties hold the balance of power.
Even if that is not the case, cross-strait relations certainly provide potential for upset.
China’s ‘nicely-nicely’ approach ahead of the vote, to make Taiwanese citizens and businesses in China feel more welcome, doesn’t wash with many, who see it as a barely concealed attempt to bring Taiwan back under the Greater China fold.
In January, China’s president Xi Jinping issued a grave warning of military invasion should Taiwan fail to toe the line. More recently, Chinese officials have tried to talk down the use of force with softer overtures for peaceful reunification.
Still, the use of cyber warfare to spread misinformation, or propagate attacks on key infrastructure, remains a possibility.
Given its sensitivity, naturally none of Euromoney’s survey contributors was willing to go on record discussing China, although one mentioned privately that Beijing would continue to adopt tactics to press its influence and would not quietly allow it to remain independent while cosying up to the US.
Another stated that while the China-US trade dispute may rattle on, it is not evident the benefits will continue indefinitely.
And, besides, there are other factors to consider, including the ‘brain drain’ of top engineers to China and other unresolved domestic political issues facing Tsai, should she win, including difficulty passing legislation.
The conventional wisdom dictates that investors can look forward to another solid year from Taiwanese assets, yet those who choose to remain overweight must do so at their own increased risk.