Taiwan Stocks Trading at Discount After China Fracas

After more verbal fireworks, Taiwanese companies are trading at lower levels. Foreign investors are eyeing electronics stocks.
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HONG KONG -- When Taiwan and China began a war of words last week that some worried might percolate into a more serious conflict, nervous Taiwanese investors sent stocks skidding by as much as 14%.

Now that calmer heads are prevailing, some are saying the incident may have created a Chinese peace dividend.

Taiwanese companies, some of which are among the world's most efficient and productive, now trade at significant discounts to just a few weeks ago -- a development that hasn't been lost on the island's investment professionals.

"We've been recommending our top buys more aggressively," said Liu Chi Tung, technology analyst at

Warburg Dillon Read

in Taipei. "We see this as a short-term buying opportunity."

If Liu is right, investors can thank Taiwanese President Lee Teng-Hui. He helped chop prices in a market that was already up some 40% this year by stating the obvious: China and Taiwan weren't really one country after all. The comment provoked a round of saber-rattling that saw Chinese military placed on "high alert," according to Beijing-controlled newspapers. The selling climaxed as Chinese state media ran photos of amphibious-landing practice drills and troops marching next to armored personnel carriers.

The fight, a 50-year-old legacy of the Chinese civil war, flared up when Lee declared last week that he wanted to deal with Beijing on a "state-to-state" level. Beijing hates these comments, which Lee has made from time to time. Still, while the statements are explosive, they are also true. Taiwan is a separate country in everything but name. Separate elections, separate army, currency, post office, airline, you name it.

Smart institutional investors are betting that's not about to change anytime soon, even if panicky locals have been taking profits and getting out. And with companies like

Hon Hai Precision

and

Inventec

now trading almost 20% below their recent highs, there are plenty of good stocks to choose from.

Ho Hsiu-mei, manager of the steadily excellent

Schroder Taiwan Fund

, which is up 32% this year, called the past week "a good opportunity" to top up on Taiwan stocks. If history holds, Ho's advice might prove prescient.

The

Taiwan Weighted Index

fell 14% last week before recovering somewhat, but would probably not have bounced back if not for government-supported buying of both stocks and the New Taiwan dollar. That's just what happened in 1996, when China lobbed missiles in the Taiwan Strait in fury over a trip Lee made to America. Washington called it "unofficial," but Beijing was furious anyway.

What should investors be looking at? Taiwan's market is full of plenty of junk, but its electronics industry probably made most of the components of the computer you're now using, including the custom-made chip. Mark Edwards, who manages the

T. Rowe Price

(PRASX) - Get Report

New Asia fund, calls Taiwan's electronics stocks "extraordinarily profitable and well run," and picks out motherboard maker

Asustek

, up 73% this year as just one example. Edwards' fund isn't a bad choice either; it's up 41.7% this year.

And what about stocks in mainland China? These now fall 6% to 9% a day, but have been some of the world's best performing for no reason other than front-page editorials in Communist Party newspapers, which say that equity ownership is a good thing. As a result, Shanghai and Shenzhen shares tend to rise and fall together.

Philip Segal is a freelance writer based in Hong Kong. At time of publication, Segal had no positions in any securities mentioned in this article, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks or funds.