MSCI - Taiwan Contrarian investment

The technology sector has continued to grow and perform well over the last few years, particularly in the areas such as smartphones, tablets and the move to the cloud. There is perhaps no other nation as closely linked to these themes as Taiwan and the iShares Taiwan ETF is often seen as a technology proxy due to its 55% weighting in technology, and at the same time offering a 3.5% dividedn yield.  

With the risk-off trade in recent months in markets globally, Taiwan with its export-oriented economy has seen a slide in its share price over the past 6 weeks from recent highs. Taiwan does not get nearly as much attention these days as its parent, the emerging superpower China but it has its own remarkable story.

When Mao Zedong's Communist forces seized the mainland in 1949 following the Chinese Civil War, the Nationalists went into exile on Taiwan. Since then Taiwan has transformed from a backwater to one of East Asia's most prosperous locations. Today Taiwan has built a reputation for its technological prowess and ranks in the top ten economies globally in the IMD world competitiveness rankings. 

The tech sector in Taiwan is an integral part of the global IT supply chain with companies operating across the spectrum such as upstream players designing and manufacturing chips and components, contract manufacturers and downstream plays such as notebook and handset brands Acer and HTC. Taiwan is a beneficiary of the boom in consumer electronics of mobile internet devices in developed markets and increasing purchasing power in the developing world.

Growth in smartphones and tablets over the next several years will benefit foundries, OSAT (Outsourced Semiconductor and Assembly Test), component and contract manufacturing players that form the backbone of the Taiwanese technology sector.

Cloud computing; a system which enables storage and access via the Internet helps to lower costs and improve efficiency for businesses. In Taiwan’s hardware sector, cloud computing beneficiaries are foundries, OSAT, server OEMs (Other Equipment Manufacturers) and components, disk array and data centre switch suppliers. There is a move towards more chip outsourcing to foundries and OSAT players in the Taiwan semiconductor supply chain from IDMs (Integrated Device Manufacturer), including Advanced Micro Devices, Infineon, Philips, STMicroelectronics and others.

By far the largest weighting in the ETF is Taiwan Semi which is 7.9% of the Taiwan ETF. The scale of Taiwan Semi gives it a solid lead on primary competitors such as UMC with Taiwan Semi capturing around 50% foundry market share. This is important as both the financial and technology challenges of the semiconductor industry continue to spiral upwards.

In number two position, we have Hon Hai, the world's largest contract electronics manufacturer and 7% of the ETF’s holdings. It manufactures computers, consumer electronics, communications, flat-panel displays, game consoles, motherboards, servers, and televisions amongst other products.

Third in line is Chunghwa Telecom, making up 3.2% of the holdings. Chunghwa is Taiwan’s leader in domestic internet access and mobile market, which is unlikely to be displaced.

The other technology companies in the ETF may not be well known outside of Taiwan, but are often major players in certain niches. Smartphone aficionado’s would recognise the HTC brand who have the new HTC One series of smartphones making a splash, after some lacklustre models from last year’s line-up.  

Aside from the 55% weighting in technology, financials make up 14.5% and materials 14%. The rest of the fund consists of consumer, energy and industrial companies. Taiwan’s technology companies have generally very healthy balance sheets, as does the nation itself.

This report was produced by Senior Research Analyst, Andrew Latto