Taiwan's Institutional Resilience

Taiwan is illustrative of a broader transformation in emerging markets over the last decade.

    Alistair MacDonald

    Alistair MacDonaldInstitutional Portfolio Manager, Franklin Templeton Emerging Markets Equity

    Chetan Sehgal, CFA

    Chetan Sehgal, CFASenior Managing Director, Director of Portfolio Management, Franklin Templeton Emerging Markets Equity

    Taiwan is illustrative of a broader transformation in emerging markets over the last decade, according to Franklin Templeton Emerging Markets Equity’s Alistair MacDonald and Chetan Sehgal. They explain how Taiwan made its steady ascent up the value chain for manufacturing, and why Taiwan’s overall resilience could be a tailwind for the island’s economy.

    The way Taiwan has handled the COVID-19 pandemic is a testament to the quality of its governance and health care systems. Taiwan had a run of 255 days without a local transmission, but a new case in December broke the streak emphasizing the difficulty in containing the virus. While a template of lockdowns has been implemented around the globe, Taiwan’s approach has been demonstrably more successful than that of many other countries, as confirmed cases total 823 with only seven deaths.1 This reflects the preparedness and resilience of Taiwan’s institutions.

    Taiwan was the first to notify the World Health Organization (WHO) of potential human-to-human transmission of an as yet unknown virus on December 31, 2019—the date when the island also enhanced border control, including screening of passengers from Wuhan, China. Having learned lessons from the 2003 Severe Acute Respiratory Syndrome (SARS) outbreak in 2003, extensive existing public health infrastructure enabled a rapid and coordinated response, including early screening, effective quarantine, digital technologies for identifying potential cases and widespread use of facial coverings.

    Total COVID-19 Deaths per Million People Global Comparison

    Sources: Our World in Data as of 16 December 2020, University of Oxford, John Hopkins University, Official national sources.

    The Right Kind of Exports

    In many emerging markets, a central new reality is the rise of domestic demand as a driver of growth. By contrast, Taiwan’s companies derive over 70% of revenues from abroad. However, these exports are not low-quality products, nor are they commodities subject to cyclical fluctuations in demand and pricing many have historically associated with emerging markets.

    Taiwan’s highly educated workforce has been the backbone of its steady ascent up the value chain in manufacturing, whereby it is now an exporter of technology components and essential semiconductor chips that constitute the computing power behind modern technologies. The importance of these products in the world economy is only increasing, which is a powerful tailwind for Taiwan’s economy.

    From Cheap Manufacturing to Intellectual Property

    Historically, the design of semiconductor chips was where the more valuable intellectual property was concentrated—while the fabrication of those chips was often outsourced to specialized, more cost-competitive manufacturers in Taiwan. Over time, the complexity of production has increased exponentially, and only those companies with sufficient scale are able to compete. The result is increasing concentration in market share and earnings for the leaders in Taiwan.

    IT Hardware and Semiconductor Revenues: Taiwan % of Global Revenue

    Source: MSCI, FactSet, based on last 12 months of revenues of companies in the MSCI Taiwan, % MSCI AC World/ Technology Hardware & Equipment & Semiconductors & Semiconductor Equipment. 2020 data as of end November 2020. Past performance is not an indicator or a guarantee of future results.

    We see improving environmental, social and corporate governance (ESG) as a tailwind for emerging markets as a whole. Taiwan is a leader in corporate governance—illustrated by a dividend payout ratio that has risen from a low of roughly 40% in 2014 to near 70% now.2 Many companies are also leaders in terms of their environmental and social policies.

    In our view, Taiwan is illustrative of the broader transformation of emerging markets in the last decade toward a higher-quality asset class, with more sustainable sources of earnings growth. The pandemic has accelerated some long-term themes that have benefitted Taiwan, and that we expect to continue.

     

    What Are the Risks?

    All investments involve risks, including possible loss of principal. Stock prices fluctuate, sometimes rapidly and dramatically, due to factors affecting individual companies, particular industries or sectors, or general market conditions. Special risks are associated with foreign investing, including currency fluctuations, economic instability and political developments. Investments in emerging markets involve heightened risks related to the same factors, in addition to those associated with these markets’ smaller size and lesser liquidity. To the extent a strategy focuses on particular countries, regions, industries, sectors or types of investment from time to time, it may be subject to greater risks of adverse developments in such areas of focus than a strategy that invests in a wider variety of countries, regions, industries, sectors or investments. China may be subject to considerable degrees of economic, political and social instability. Investments in securities of Chinese issuers involve risks that are specific to China, including certain legal, regulatory, political and economic risks. For stocks paying dividends, dividends are not guaranteed, and can increase, decrease or be totally eliminated without notice.

    ENDNOTES

    1. Source: Taiwan Centers for Disease Control, as of January 7, 2020.

    2. Sources: MSCI, Bloomberg, Macrobond. Payout ratio represented by that of MCSCI Taiwan Index. Indexes are unmanaged and one cannot directly invest in them. They do not include fees, expenses or sales charges.