Q I regret not having invested in China last year as I was amazed to read how well the market has again performed over the past year. I am now convinced I want to invest some money into the market. Rather than invest solely into China, I am interested also to invest in Hong Kong and Taiwan. Is this advisable and what are the prospects for Taiwan, in particular, as I see this offering potentially the greatest risk?
A Investing in the Greater China markets of China, Hong Kong and Taiwan gives the investor access to both large Chinese corporates, which dominate their domestic sectors while adding others from Hong Kong and Taiwan, many of which are the most effective at maximising Chinese manufacturing supply chain.
China remains the fastest growing market in Asia with an economy that has recently surpassed the UK to become the world's fourth largest economy. Economic growth has twin drivers of investment and domestic consumption, and neither shows any immediate signs of deceleration.
Mainland China's GDP growth is projected to be around nine per cent and the government is operating a very pro-consumer policy agenda (rural spending packages and tax breaks for middle income families). With the Beijing Olympics in 2008 and other major infrastructure programmes, investment is also likely to remain buoyant.
Hong Kong continues to be the financial hub for China and rapid employment growth in professional services and tourism has boosted consumption and the property market.
Hong Kong now attracts over 12 million mainland Chinese tourists per year (Macau gambling, Hong Kong Disneyland and shopping are the big attractions). In the event of a global downturn many companies in Hong Kong and Taiwan pay attractive dividend yields, which should help support share prices.
As regards Taiwan, it is the world's leading contract manufacturer of technology hardware, such as PCs, mobile phone handsets, DVDs, LCD/Plasma TVs and the semiconductors that drive these items. Two-thirds of all of these are actually assembled in Taiwanese-owned factories in mainland China to take advantage of cheaper labour costs.
Taiwanese technology companies generally operate at both ends of the value-added spectrum - commoditised assembly such as cellular phone handsets and laptops to very sophisticated chip design and assembly.
Increased trends to outsourcing manufacturing by companies like Nokia, Dell and Sony has led to a structural rise in orders.
The market is dominated by technology companies, many of which are world leaders, with the tech sector representing about 50 per cent of the Taiwan index (other sectors include steel, banks and chemicals).
Internal politics and uncertainty over cross-straits relations (with China) has weighed on the market though, leading it to underperform Asia in 2005 and 2006. Valuations have already factored in the uncertainty though. Domestic confidence is however finally returning after consumer credit write-offs.
As one of the cheapest markets in Asia, and trading at 12 times PE, it has one of the highest earnings growth of 20 per cent for 2007. It also boasts one of the highest dividend yields of 3.6 per cent in Asia (double the government bond yield).
Taiwan and Greater China in general does offer great prospects but, as always, carries risk. One should consider a sensible proportion of one's wealth in this region. (Source: J.P. Morgan)
Mark Hollingsworth is the director of Hollingsworth International Financial Services - licensed by the MFSA to provide investment services under the Investment Services Act 1994 (IS/32457). Address any financial questions to: Mark Hollingsworth, c/o The Sunday Times, PO Box 328, Valletta CMR 01. Alternatively, he can be contacted on 2131-6298/9984-2614 or e-mail mh@hollingsworth-int.com
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Past performance is no guide to the future and, except where amounts are guaranteed, the price of your investments (and the currency in which it is denominated) may fall as well as rise. Your personal tax situation will depend on residence. Always consult a professional adviser. This article does not intend to give investment advice and its contents should not be construed as such. Readers are encouraged to seek professional advice on their personal financial situation.