A new bull market stirs!

Over the past half century Taiwan has grown to become the 17th largest economy in the world. Services account for 72.7 percent of total gross domestic product (GDP) industry, 25.6 percent and agriculture the remainder. Taiwan's economy is open and heavily impacted by global economic growth and trade.

In 2004, the country exported $174 billion in goods and services. The main export industries are; electronics, information and communications products, textile products, plastic and rubber products. Taiwan's biggest customers are China and Hong Kong ($64 billion) the US ($28 billion) and Japan ($13 billion). On the import side Taiwan absorbed $168 billion in goods and services, giving the country an annual trade surplus of $6 billion. Imports consist of electronics, information and communication products, chemicals and crude oil. Major suppliers to Taiwan are Japan ($43.6 billion) the US (21.6 billion) and China ($18.8 billion).

After stagnating for nearly a decade, we believe the Taiwan stock market now presents an attractive investment opportunity to Members. Rapid growth and a successful export industry have helped Taiwan become a creditor nation, holding the world's third largest stock of foreign reserves ($257 billion as of January 2006). Solid economic growth of around 4 percent is forecast to continue in 2006. Inflation is well contained, running at an annual pace of around 2.7 percent, despite a low unemployment rate of 3.8 percent.

One investment vehicle which we believe is an excellent proxy to the Taiwanese economy is the Taiwan Fund, Inc. (TWN, NYSE). TWN is a diversified, closed-end management investment company which commenced operations in December 1986 following an initial public offering. The Fund has around 16.4 million shares outstanding which are listed on the New York Stock Exchange (NYSE) and is currently capped at around $270 million.

The Fund is designed principally for U.S. investors who wish to participate in the Taiwan economy through investment in equity securities listed on the Taiwan Stock Exchange (TSE). The Fund aims to invest at least 90 percent of the underlying assets in equity securities that trade on the TSE. The Fund may also invest in equity securities which intend to list on the TSE in the near term, along with securities that trade in the over-the-counter market in Taiwan.

Investor sentiment toward TWN has improved significantly over the past four months. Renewed buying interest in the closed end fund has seen the share price break above resistance at US$14.50 and run to a five and a half year high of US$17.35 in recent weeks. The advance above US$14.50 is the most significant feature on the weekly chart as it represents a positive breakout from a five year basing pattern that formed after a decade long bear market.

We believe the underlying valuation of the Taiwan stock market is attractive, with a dividend yield of around 4 percent which is significantly above Taiwan's 10 year bond rate of 1.8 percent. The market is valued on a prospective price earnings ratio of 13 times and a price to book ratio of below 2 times. This valuation compares favorably to other Asian countries such as China, South Korea, Japan and Thailand.

The Taiwan Fund is diversified over a broad spectrum of the economy, with investments in cement, chemicals and plastics, construction, electrical/electronics, finance, banking, food, textiles, glass, rubber, pulp and paper, metal products and machinery, retailing and tourism.

As at the end of November 2005, the Fund had the following weightings in the top 10 sectors.

When investing in new companies, the Fund considers overall growth prospects, competitive position in export markers, technology, research and development, productivity, labor costs, raw materials costs and sources, profit margins, return on investment, capital resources, government regulation, management and other factors.

In summary, we believe the Taiwanese stock market is now undergoing a broad based recovery after a lengthy bear market. The underlying value of Taiwan equities compares favorably with other countries in our opinion. We believe the Taiwan Fund represents an investment opportunity to investors, being a proxy for the Taiwanese stock market. Given the extent of the recent advance some consolidation is possible in the near term, however, we believe firm support between $14.50 and $14 should underpin a broader recovery. In the coming months, we believe prices will extend above $17.35 toward the $19 region. Accordingly, we recommend TWN as a buy to all Members around $16.50

Background information
Taiwan, an island just off the mainland of China, is one of Asia's most developed and prosperous economies. Unlike the emerging economies of mainland and South East Asia, Taiwan boasts a highly skilled workforce which has assisted the country greatly with producing high value added goods.

Background information
Taiwan, an island just off the mainland of China, is one of Asia's most developed and prosperous economies. Unlike the emerging economies of mainland and South East Asia, Taiwan boasts a highly skilled workforce which has assisted the country greatly with producing high value added goods.

Background information
Taiwan, an island just off the mainland of China, is one of Asia's most developed and prosperous economies. Unlike the emerging economies of mainland and South East Asia, Taiwan boasts a highly skilled workforce which has assisted the country greatly with producing high value added goods.

The story of Taiwan's emergence as a largely 'westernized' (and wealthy) economy is an interesting part of history. Prior to 1895, Taiwan came under the auspices of China, however, following the Chinese defeat in the Sino-Japanese War, control passed to Japan. From 1845 to 1945 Taiwan was under Japanese colonial rule, during which time some effort was expended to develop the economy. This included compulsory Japanese education.

Subsequent to Japan's defeat in WWII, Taiwan reverted to Chinese rule. It is this period of history that had the most impact on Taiwan's future development. At the time China was in the midst of a civil war between the Nationalist Chinese and Mao Zedong's Chinese Communist Party. Following the communist victory in 1947, 2 million refugees, predominantly those from the Nationalist government and business community, fled to Taiwan.

At the time Taiwan was an agricultural economy, supported largely by sugar and rice. However, the influx of businessmen from the mainland joined cashed-up former landowners (who received government compensation in a land re-distribution scheme) to become Taiwan's first industrial capitalists. The combination of capital and business acumen transformed Taiwan from an agricultural to an industrial economy. Over the ensuing decades Taiwan has grown into a technologically advanced and wealthy nation.