10/23/09 11:19AM EDT

Research Edge Portfolio Position: Long EWT

Export Orders data for September released by the Ministry of Economic Affairs this morning showed that order flow last month picked up sequentially to a year-over-year decline of -3% as Production levels rose to positive year-over-year growth for the first time in 12 months (see chart below).

PANDA HUG - tai1

On an absolute USD basis, orders exceeded every month since October of last year, a sign that the warming relations with the mainland are firing a strong recovery, with critical Electronics sectors feeling the largest impact of Beijing’s stimulus (see chart below).

PANDA HUG - tai2

Not everyone views this apparent mainland largess as purely positive however; in a legislative committee meeting on Wednesday, Minister of Economic Affairs Shih Yen-shiang again voiced his firm stance that the proposed economic cooperation framework agreement will exclude cheap mainland industrial and agricultural goods and, critically, cheap mainland labor in response to continued criticism.  DPP Legislator Su Chen-ching responded that the proposed agreement is heavily skewed in favor of the mainland and would be “unfair and humiliating” for Taiwan to sign.  The overlapping political issues facing lawmakers are daunting: beyond the understandable mistrust of Beijing, which still refuses to acknowledge Taiwan’s status as an independent nation, concerns about job and intellectual property security are significant. At 6.09% the unemployment rate is at the highest level in over 30 years, making the prospect of a flood of cheap migrant labor from the mainland untenable for elected officials. Meanwhile, other voices in government have taken issue with the prospect of PROC based companies acquiring Taiwanese strategic technology through acquisition.

We are long Taiwanese equities via EWT, and continue to believe that orders from “the client”, particularly the voracious appetite for consumer electronics of the rising mainland consumer class, will drive a strong recovery in the coming quarters. On measure, we do not envy the leader there however, as they calculate the risks and rewards of accepting Beijing’s “panda hug” embrace.

Andrew Barber


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