Research Edge Position: Long Taiwan via the etf EWT
While Taiwan’s political status is complex, the signal sent by the reported export numbers from Taiwan are unambiguous. Taiwan’s export orders climbed for the first time in 13-months, up 4.4% in October from the year ago period, which was an improvement over the -3.0% drop in September. Export orders are a leading indicator for shipments for the next 1-3 months and bode well for the economic growth of the Island state in the coming quarter. This growth in exports was likely driven primarily by China, which is Taiwan’s largest trading partner and grew 8.9% last quarter on a year-over-year basis.
The government also indicated today that industrial production rose 6.6% in October from a year ago, a sequential acceleration from September’s +1.7% year-over-year growth, which was revised upwards today. The other positive data point released today was a slight sequential decline in the unemployment rate, from 6.09% in September to 6.04% in October.
Taiwan’s largest export industry is electronics and Taiwan Semiconductor, the world’s largest custom-chipmaker, recently said it expects to see a re-acceleration in its business and end markets. Specifically, Taiwan Semiconductor is raising its capital spending budget to $2.7BN from a July estimate of $2.3BN, an implication that the company is expanding capacity in anticipation of future growth.
Interestingly, over time the Taiwanese have consistently diversified their export base away from the United States. In the early 1980s US-bound exports represented ~50% of its export base; that number is now less than 20%. Additionally, it appears Taiwan is better positioning itself to take advantage of global GDP share by attaching itself to the market share that the Chinese will take in the coming decade. Currently China buys ~23% of Taiwanese exports.
The negative impact of current U.S. fiscal policy as implemented by He Who Sees No Bubbles (Bernanke) is that the weak dollar and emerging bubble we’re seeing in U.S. dollar priced commodities (i.e. copper and oil) is actually quite negative for Taiwan as the country imports the vast majority of its energy and basic material needs. Currently Taiwan uses about 2.2MM barrels per day (importing more than 98% of this), so it is clearly at the whim of the volatile global commodity markets.
Setting aside the negative potential impact of commodity inflation, the economic data points emerging from Taiwan are supportive of a continued economic recovery and support our long thesis.
Daryl G. Jones