In May the fund gained 2.6%, which was led by our holdings in Taiwan and Financials. Much of the strength in Taiwan was attributable to an unexpected 9% surge of the Taiwan Dollar which happened over just a few days.
China is the market that’s normally in the spotlight for currency manipulation, but Taiwan is just as much of a mercantilist country prioritizing export growth over domestic consumption. According to the BIS, before this month’s move the Taiwanese dollar’s real effective exchange rate had declined by 18% since 2000, despite running an average current account surplus of nearly 10% of GDP over the same period. This is a policy driven by the central bank’s longstanding goal to protect the export sector – originally steel and petrochemicals but now semi-conductors.
Sustaining this undervaluation is achieved by channelling surpluses into reserves by buying U.S. Treasuries, which now exceed $750 billion and ranks the country among the top five globally. Previous US administrations have tacitly tolerated the practise, but this could now be wishful thinking.
It’s possible this year’s ‘Big Mac Index’ hasn’t help in this regard. Taiwan ranks 1st with the cheapest burger in the world costing just $2.28, lower than Indonesia ($2.46), Egypt ($2.47), India ($2.75), and South Africa ($2.85). Whilst it’s only illustrative, it implies a deeply undervalued currency being 59% cheaper than the benchmark US burger.
This links to the broader question we get asked a lot more these days, which is our view on the dollar. Whilst we have no particular franchise in FX forecasts, the first issue to clarify is: … against what? Here it seems we can have higher conviction on the Asian currency appreciation than most. Of course, this is fine for domestically orientated companies, but it will hit earnings to any exporters that don’t have meaningful pricing power.
All this comes at a time when there’s been another important watershed moment in Asia, which could be very positive. South Korea has now elected the left-wing candidate Lee Jae-myung to be President, which may seem a surprising statement considering Lee liked to describe himself as the Korean equivalent of Bernie Sanders (he did take a more moderate tone during the election). What’s got investors excited is his strong commitment to resuming of the ‘Value Up’ agenda.
South Korea is the cheapest major market in our universe trading on just 0.8x price to book and 11 times earnings (compared to China on 1.4x and 16x earnings).’Value Up’ was initiated by the previous regime back in Feb 2024 but faded given the legislative deadlock. Now Lee’s party has a clear majority, so they are able to make some genuine changes to eliminate the persistent undervaluation due to weak corporate governance, lack of market transparency, and insufficient shareholder protections or dividends.
The proposed changes are significant amendments to the Commercial Code, as well as tax incentives for higher payouts and dividends. This potential transition from value trap to long term compounder is very significant, he’s even given himself a target of ‘Kospi 5000’ – a bold move considering it was at 2700 before the election. With an estimated 86mn local retail brokerage accounts, it’s been an effective way of getting their votes!
