Taiwan elections could signal a turning point

The Taiwanese stock market has been one of the World's poorest performers this decade according to Ben Akrigg, Director of Pacific Equities at F&C Investments:

An island of stagnation in a sea of prosperity, it has lagged the markets of Asia ex-Japan (as measured by the MSCI) by over 60% since the last days of the 90's technology bubble. A starting point of high valuations, and a market weighting of around 50% in technology stocks were certainly a harm as the technology bubble collapsed, but in more recent years another factor has been at work – political gridlock, and the lack of political drive to prevent Taiwan's slide towards becoming, like Japan, a (relatively) wealthy backwater, whilst the rest of the region booms.

The political backdrop has been a clear hindrance. Whilst Hong Kong's closer relations with China have allowed it to enjoy a 'second wind' as a gateway and service centre to China, the reluctance of Taiwan's pro-independence President Chen Hsui Bien (from the nationalist Democratic People's Party) to engage with China has prevented it from enjoying any such role. Meanwhile a parliament (the 'Legislative Yuan') in the hands of the opposition KMT has left a government in gridlock, unable to pass much needed reforms to encourage greater investment at home. In response Taiwanese businessmen and investors have voted with their wallets, sending an estimated $100bn to invest in China directly, leaving the domestic economy relatively stagnant.

Today's elections for the Legislative Yuan, 2 months ahead of Presidential elections, suggest a major change could be ahead of us. Whilst the KMT was expected to gain a majority, the scale of its rout of the DPP (the KMT won 81 of the 113 seats, with another 4 for like minded independents and just 27 for the DPP) was far beyond expectations. The KMT, which enjoys far warmer relations with China, can now dominate the legislative agenda, and were the DPP's Presidential candidate Frank Hsieh to unexpectedly win in March, he would have to be cognisant of the fact that the KMT's greater than 2/3 majority may allow them to impeach any President who was too obstructive. Meanwhile, the scale of today's win means that KMT Presidential candidate Ma Ying-Jeou (a clear favourite with investors), already well ahead in the polls, is now a clear favourite.

A unified KMT government, less provocative towards China than the current administration, and able to effectively pass legislation, could be a turning point both for domestic reform and for relations with China. China would have a clear incentive to offer 'olive branches' to Taiwan much as it has with HK, to demonstrate the benefits of working with the mainland (and prevent frustration leading to a swing back to the DPP in future Taiwan elections). Meanwhile domestic reforms could encourage some of Taiwan's exported wealth to return home in search of investment opportunities. Although nothing in politics is certain, much less so in Taiwan, today's election results may just portend an inflection point for one of the original, but recently much maligned, Asian Tigers.