iShares MSCI Taiwan Capped ETF May Benefit From The Escalating Trade Tensions – iShares MSCI Taiwan Capped ETF (NYSEARCA:EWT)

ETF Overview

The iShares MSCI Taiwan Capped ETF (EWT) owns a portfolio of stocks that trades in Taiwan’s stock markets. The ETF basically tracks the performance of the MSCI Taiwan Index. Stocks in EWT’s portfolio may benefit from escalating trade tensions between the U.S. and China as Taiwan is one of the beneficiaries of the trade war. Although some companies in EWT’s portfolio may be impacted by the trade tension, we think long-term benefits outweigh near-term challenges, as capital expenditures will drive long-term growth. Therefore, we think any pullback will provide a good buying opportunity.

Data by YCharts

Fund Analysis

Taiwan is benefiting from escalating trade tensions between the U.S. and China

Most stocks in EWT’s portfolio will benefit from the escalating trade tensions between the U.S. and China. This is because Taiwan is one of the few countries that actually benefits from the recent trade escalations between the U.S. and China. According to a report by Japanese investment bank Nomura (see chart below), Taiwan’s GDP will get a 2.1 percentage boost from additional U.S. tariffs on China. This number is only second to Vietnam. In fact, Taiwan’s export to the U.S. has increased by 17.4% year over year in the first half of 2019. As a result, the government has also recently raised its GDP growth forecast this year to 2.46%. This was an improvement of 27 basis points from its previous forecast of 2.19%.

Source: DW.com

The boost to Taiwan’s GDP growth is primarily due to two sources. First, Taiwanese technology companies are diversifying their production lines from China to other places such as Taiwan. This move will increase Taiwan’s employment rate and result in higher consumer confidence. Therefore, we expect sectors such as financials (19.9% of EWT’s portfolio), consumer discretionary (4.7%), and communication (4.1%) to benefit from this shift.

Source: iShares Website

Second, many technology companies will benefit from the trade war as many firms in EWT’s portfolio either have diversified manufacturing locations already and/or hold strategic patent or technologies that are important to both the U.S. and China. For example, Taiwan Semiconductor Manufacturing (TSM) (represents 22.7% of EWT’s portfolio) is the world’s largest semiconductor foundry. American companies such as Apple (NASDAQ:AAPL), Qualcomm (NASDAQ:QCOM), Nvidia (NASDAQ:NVDA), and Advanced Micro Devices (NASDAQ:AMD) rely on the company’s state-of-the-art technologies to manufacture chips. Other companies such as MediaTek (OTCPK:MDTKF) (2.97% of the portfolio) will benefit from the trade tensions as many Chinese mobile phone manufacturers such as Huawei and Xiaomi (XI) increases their orders from MediaTek instead of buying from Qualcomm. Therefore, many technology companies in EWT’s portfolio will benefit from the trade tensions.

Source: iShares Website

Risks and Challenges

High exposure to technology sector

Investors of EWT need to be aware that the information technology sector represents over 50% of its total portfolio. This sector tends to be highly cyclical and stocks in the sector tend to be much more volatile. Therefore, EWT’s fund price can be quite volatile as well. In an economic recession, these companies tend to underperform as well.

Many technology companies are Apple’s key suppliers

As pointed out in our previous article on EWT, many of the companies in EWT’s portfolio are Apple’s key suppliers. As can be seen from the chart below, Apple suppliers represent nearly 40% of EWT’s portfolio. If Apple delivers a weak quarter, many of these stocks may be impacted negatively.

Source: Created by author

Valuation Analysis

EWT’s valuation is not expensive. Stocks in EWT’s portfolio currently trade at an average forward P/E ratio of 15.57x. This is nearly 3x multiples below the S&P 500 Index. Its price to cash flow and price to book ratios are also much lower than the S&P 500 Index. Nevertheless, EWT’s dividend yield of 2.95% is higher than the S&P 500 Index’s 1.9%.

Source: Morningstar, Created by author

Data by YCharts

Investor Takeaway

Despite some near-term headwinds, we think over the long term, stocks in EWT’s portfolio may benefit from an improving economy in Taiwan thanks to the escalating trade war. We think any pullbacks will provide investors with good investment opportunities.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: This is not financial advice and that all financial investments carry risks. Investors are expected to seek financial advice from professionals before making any investment.