The Most Exciting Stock Market in the World Right Now
By Tom Dyson
September 4, 2008

"It's like Cuba opens its markets for the first time, except everyone in America is Cuban, and there are one billion of them..."

Yesterday, I had lunch with the chairman and founder of one of Taiwan's largest financial services firms. Let's call him Mr. Cheng. (I can't give his real name... He's too well known in the business world.)

He took me to an expensive French restaurant. We had our own private room. The waitresses would tap lightly on the door before coming in. And then they'd bow to us...

Mr. Cheng says the opportunity in Taiwan stocks is a "one-in-ten-lifetimes opportunity."

Like Cuba, Taiwan is a small island with enormous potential, politically isolated from one of the world's most powerful economies. Investors drool over the prospect of Cuba opening its doors to American investment. They should be drooling over Taiwan...

The island of Taiwan split from China in 1949 following a civil war. But China still claims Taiwan as its territory and threatens to attack Taiwan from time to time. Officially, the two countries remain at war. This political uncertainty creates news headlines and deters investors from buying Taiwan stocks. So much so that Taiwan is the cheapest stock market in the developed world.

My colleague Ian Davis does great work analyzing world stock markets. He's crunched the P/E ratios, the dividend yields, and the price-to-book ratios of all the countries in the Datastream database of international stock indexes.

Tawain's Taipei stock market is on the bottom right now with a dividend yield of 5.4% and a P/E ratio of 11. Not only is Taipei the cheapest market in the world relative to all the other markets, it's also the cheapest market relative to its own historical standards. People just can't stand the thought of investing here.

But most people don't realize commercial relationships between Taiwan and China are booming. Trade between mainland China and Taiwan will probably reach $120 billion this year.

According to the Associated Press, Taiwanese companies have invested more than $120 billion since the early 1990s in mainland businesses. These businesses supply advanced plant and equipment – like high-tech electrical machinery or rare industrial textiles – to the factories and industries of mainland China.

And the political relationship between China and Taiwan is improving. In March, a new president won power in Taiwan. His name is Ma Ying-jeou. Improving relations with China is at the top of Ma's agenda.

For example, the first direct flights between Taiwan and China in 60 years flew in July. Taiwan will allow 3,000 Chinese tourists to visit every day. That's a big deal. According to Goldman Sachs, direct flights and cross-strait tourism may add 60 to 80 basis points to Taiwan's economic growth.

It's still illegal for Chinese investors to invest in Taiwan... and for Taiwanese investors to invest in China. But that's changing, too.

In August 2007, Chinese authorities unveiled a plan for mainland residents to invest in Hong Kong. This was the first time the government had allowed Chinese investors to invest outside Shanghai. The news sent Hong Kong's Hang Seng Index up 55% in 10 weeks.

I think Taiwan could be one of the next markets Chinese authorities open up to mainland investors. If this happens, we should see a similar pop in Taiwan's stock index.

Three Stocks to Double Your Money in the Next Asian Market Bubble When to Buy My Favorite Asian Stock Market

Taiwan is very cheap right now. Its large public companies hold enormous amounts of cash, so it's a great place to earn dividends... And it's slowly opening itself up to a huge economic power.

Mr. Cheng has made millions and millions from the stock markets. He's as bullish as can be on Taiwan. In my next column, I'll show you another reason to follow his lead.

Good investing,

Editor's note: Tom Dyson is a regular contributor to DailyWealth, a free investment newsletter focused on the world's best contrarian opportunities. We write with a simple belief in mind: You don't have to take big risks to make big money with your investments.

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