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Why not invest in Taiwan?

Updated: Sep 12, 2021

Investing in stocks is easier than ever with emergence of online and cheap platforms like Robinhood or eToro. This is great, because everyone now is turning to stock markets, with bigger markets like US, China, Japan taking most of the retail investor’s attention. However this has made those markets extremely competitive and it is very hard to spot good opportunities. To help with this we got data on biggest 100 stocks on several of the leading stock markets and got interesting findings. In our research these markets are:

- Australia,

- France,

- Hong Kong,

- Japan,

- South Korea,

- Singapore,

- Taiwan

- USA.

Stocks in each market are ranked by market capitalization and top 100 are selected as representative sample. From this sample for each market are estimated several median fundamental ratios, performance, overpricing and opportunity. Data is from public databases like Yahoo, Inc and Investing.com. Our overall conclusion is that of all these great markets Taiwan is making very good impression and it deserves a look by retail investors.


Why Taiwan?


In our opinion there are several key indicators that make a stock market good for investing. Of course we can say that 3.12% GDP growth or unstable political situations are signs of whether anyone should invest in Taiwan, however for more professional investors it is required to make deeper analysis. First we need to estimate the fundamentals of each market like Net Margin that will tell how good are the companies in this market (financially and operationally). Second, it is required to check how much “overpriced” is this market, usually it is done by estimating median P/E ratio. Third and perhaps most important for stock investors is the calculation of opportunity in this market. This is done by estimating cross-sectional dispersion between stock returns. The logic is that if stock returns are more dispersed then there will be “big winners” and “big losers” and this is opportunity if you are able to correctly predict them. Analyzing these factors and comparing to other markets we can say that Taiwan has good fundamentals, great mid-range pricing and offers best opportunity in terms of return dispersion. So lets dive into the analysis.


Fundamentals


In our research we estimate net margin to get an idea of current fundamental valuation of these markets. Lets see the Net margin:


Fig.1 Median Net margin biggest 100 stocks in each market


In the sample US has biggest median Net margin with almost .19 of every dollar revenue is coming as earnings. After that Taiwan and Hong Kong have respectively .15 and .12 margins, which are pretty good and on par with US economy. Japan and Australia are in the middle with margins less than .10 and the bottom pack is with France, Korea and Singapore. Net margin is important metric that shows the financial and operational efficacy of the stocks. In the end you don’t want to buy stocks of inefficient businesses. The idea of this median ratio is to show which markets have good, efficient stocks. On this Taiwan stays pretty good as 2nd place to US.


Pricing


Next we need to analyze what is the current pricing of the fundamentals. Are they expensive or not? You don’t want to buy stocks with too high Price to Earnings ratio, because there might be little room to grow further. Especially if you are serious fundamental or value investors you want low P/E ratios so that you can catch the growth in price when those good fundamentals increase price. Last but not least high pricing of the market is often good indicator that we are in a bubble and there might be downturn coming soon.

In our analysis we calculate two pricing ratios. First is the median P/E ratio of those 100 biggest companies in each market:


Fig.2 Median P/E ratio for biggest 100 stocks in each market



It is brutally evident that US has very high median P/E, which is no surprise given the recent growth of the stock market. This means that although prices have been up recently, the earnings cannot keep pace. Other overpriced markets are Australia, France and Japan which shows interesting trend that typical developed markets have bigger P/E ratios than emerging markets. Usually it should be the other way around due to higher risk and growth expectations, but recent growth of those developed markets made them overpriced. On the other hand Taiwan and Hong Kong have great P/E with around 16x and 8x, which means that there are very good potential for future growth of this pricing.

Additionally lets estimate also the Price to Revenue ratio, that compares the stock price with 1 dollar of revenue. It has similar logic like P/E and if it is too high then it is evidence that current stock prices are disconnected from what companies actually generate as revenue:


Fig.3 Median Price to Revenue for biggest 100 stocks in each market


US has too high P/Rev ratio just like P/E and this validates that it is outrageously overpriced. P/Rev ratio is almost twice as high in US than other markets, and yes there might be good fundamentals but current pricing is just too high for investment. Similarly Australia, Japan and France have quite high pricing ratios with mid-level fundamentals and this makes them even less attractive. However Taiwan and Hong Kong have great P/Rev especially considering our findings of Net margin, basically we get great margins (efficient business models) that are not too expensive. This is the strongest argument that Taiwan and Hong Kong are very good prospects for investment.


Opportunity


Analyzing the fundamental properties and current pricing of markets help us to choose best stock market to invest in. At this point it is enough to buy ETF on the main index and get overall exposure to this market. However most of us want a bit more and we will be looking to select best stocks. There is a universe of various strategies and models to evaluate and select stocks and this is not part of the strategic allocation (selecting market). But when we are selecting market to invest it is a “must” to know what is the opportunity for stock selection. In other words even if you are able to forecast correctly “winners” (best stocks) and “losers” (worst stocks) if there is not enough difference between them then it is pointless. This is what we are calling “opportunity” in the market. Such difference is best measured by the dispersion of stock returns over selected period. Here we estimate the dispersion of biggest 100 stocks in each market over the last year:


Fig.4 1Y Return dispersion of biggest 100 stocks in each market



Our preferred market Taiwan has biggest dispersion among selected markets. This means that in Taiwan the gap of returns between best and worst stocks is really big and if you are able to guess which are the winners then you will win big. It is interesting that US although with very high pricing and good fundamentals has very low dispersion (opportunity). This is because of big correlation between stocks in US and it is most likely driven by passive investors. Other East Asian markets like Singapore and Hong Kong also have good opportunity, but we based on previous factors we have to drop them and keep our favor in Taiwan.


Final conclusion


For every global investors exist the question which stock markets should be included in their portfolios. Platforms like Interactive Brokers offer several propositions. That’s why we took some time to analyze them and offer our insight to everyone interested. So the performance over the last 1Y of our markets was:


Fig.5 Average performance of biggest 100 stocks in each market for past year



We see that Taiwan has biggest gains ahead of the main pack – US, AU, SG and KO (offering similar gains). However we know that for every serious investor it is not enough to see past performance. That’s why in this research we covered several different criteria like fundamentals, pricing, opportunity. All results can be summarized in the table below:


Fig.6 Comparative table between markets


US looks very good in terms of fundamentals and performance, but is extremely expensive (in terms of pricing multiples) and very correlated. Other markets also have some good characteristics in some areas but not consistently. On the other hand we can state that Taiwan is stock market with great fundamentals that is currently much cheaper than US that has performed very good in recent years. In the same time offers best opportunity for active investing.


Link to interactive dashboard: Here