Why Investors Are Looking at Taiwan

Consider a place that has had only 476 Covid-19 cases and just 7 deaths. This sounds like a rural town in the US with a small population and good access to medical care. Actually, it is Taiwan, a small country in Asia with a very dense population of 23.6 million people, situated about 100 miles off the coast of the China mainland, where the coronavirus originated. On a per capita basis, the US has had more than 1,200 times as many COVID-19 deaths as Taiwan has. There has been no local transmission there in more than three months. Taiwan's success in combating this virus is unmatched. It occurred despite the fact that more than one million Taiwanese work in China and there is constant travel between the two nations.

There are several reasons for Taiwan's success. The country has learned from its past experiences of having to deal with viruses coming from China, in particular, SARS. The government gave serious attention to planning how to deal with future threats. The population, like those of a number of Asian countries, is used to wearing face masks to limit the spread of disease. But the unique Taiwanese advantage in confronting COVID-19 is the advanced state of the nation’s digital health infrastructure and its readiness to apply it. All citizens have a health card containing their medical history, with a unique ID that is used by all healthcare facilities and doctors. The authorities were able to merge this information with immigration and customs data to identify and test patients most at risk. Taiwan's testing, tracing, and isolating proved key to checking the spread. No widespread lockdowns were needed. It is important to note the important role played by the country's democratic norms and institutions. The leadership has demonstrated transparency, honesty, and respect for democratic processes while avoiding politicizing the pandemic.

The Taiwanese economy is benefiting from both its success so far in combating the virus and a $35.9 billion government stimulus program to help offset the headwind from the 4.9% decline projected for the global economy. Consumers started in July to spend government-issued vouchers for consumer goods and tourism, and several weeks ago the government tabled a second supplementary budget for 2020 of $7.13 billion to boost sectors hit by the pandemic. More important than these measures has been the resumption of strong demand for Taiwan's high-quality telecommunications exports, helped by people around the globe working from home.

Taiwan's manufacturing downturn in April and May eased in June, with the HIS Markit Taiwan Manufacturing PMI rising to 46.2 from 41.9 in May. In July the PMI moved into expansion territory at 50.6 with output stabilizing. Supply chains are still under pressure and employment continued to decline. Tourism and aviation have been hard hit.

Taiwan's budget office expects the economy to advance by 1.67% this year, a little slower than the 1.77% gain projected by the Chung-Hua Institution for Economic Research. The Taiwanese economy is classified by the International Monetary Fund as an advanced developed economy. It is looking like Taiwan’s economy will be the only advanced economy to achieve a positive annual rate of growth this year.

Looking beyond 2020, Taiwan looks well situated to take advantage of the projected recovery of the global economy and continued outperformance of the technology sector. Its most important export is semiconductors, an industry key to the accelerating development of 5G technology. China, Taiwan's most important export market, is expected to expand strongly next year.

Taiwan's stock market has done better than most national markets so far this year. The iShares MSCI Taiwan ETF, EWT, has recovered from a sharp drop in March and is now up 9.8% year-to-date August 4. In comparison, the iShares MSCI all countries ex-US ETF, ACWX, is still down 6.3%, and the advanced-country ex-US iShares MSCI EAFE ETF, EFA, is down 8.4%. The outperformance of EWT reflects the heavy, 54%, weight of technology stocks in the ETF, with Taiwan Semiconductor Manufacturing Co. accounting for 23.3%. There are several downside risks to monitor. The global economic recovery could be slowed by further outbreaks of the pandemic. China-US relations could deteriorate further, impacting international trade. China could step up its pressure on Taiwan, following its oppressive actions towards Hong Kong. Cumberland Advisors is maintaining its EWT positions in its International and Global ETF portfolios.

Cumberland Advisors holds ACWX in its investment portfolios. The author holds ACWX in his personal investment portfolio.

Bill Witherell, Ph.D.
Chief Global Economist & Portfolio Manager
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