Emerging Market Pair Trade: Overweight Taiwan, Underweight China
by John Mullin, May 2018

  • Taiwan is more attractive than China in the categories of value, growth, and risk.
  • Both markets trade at roughly 15x trailing earnings. However, Taiwan’s multiple is less expensive than its 16x historical average, whereas China’s multiple is substantially more expensive than its 12x historical average.
  • Also, Taiwan offers a substantially higher dividend yield than China (3.7% vs. 1.7%).
  • Taiwan’s forecast 2018 GDP growth has been upgraded by 0.5% over the past six months, which is more substantial than the corresponding 0.1% figure for China.
  • China’s risk indicators are generally unfavorable. The market’s beta risk is relatively high, and its domestic credit growth has been substantial in recent years.
  • One caveat for the proposed pair trade is that China’s year-over-year price momentum has been stronger than that of Taiwan.

 

Note: This recommendation is based on our return forecasts for the Morgan Stanley Capital International (MSCI) Taiwan and China country return indexes (the latter of which is mostly comprised of H shares).

Key Reasons for Overweight Taiwan Underweight China

John can be reached at jmullin@dcmadvisors.com.