Now may be the time to invest in Taiwan

Taiwan's stock market is seriously undervalued. But trade with mainland China is booming and if the political climate thaws, Taiwanese stocks could go through the roof.

Jim Rogers is one of the world's best investors. I've followed his recommendations and ideas for 15 years, and I've never seen him make a mistake...

Now Jim has a new "favorite" investment. Rogers is buying Taiwanese stocks. He started buying in March. How much will Taiwanese stocks rise? We've seen a situation like this before...

In 1987, a new president won power in Taiwan and improved relationships with China... just like we're seeing today. Taiwan's stock market rose from 1,100 to 12,000 between 1987 and 1990. That's a gain of 990% in three years.

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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. Look how badly Taiwanese stocks performed over the last two years:

Market Performance Jan 2006Jun 2008

Shanghai Stock Exchange: 153%

Hong Kong Stock Exchange: 57%

Taiwan Stock Exchange: 25%

On average, regional stock markets in Asia have risen 90% since January 1, 2000. Taiwan's stock market actually declined 3% this decade... and 18% since 1997.

Taiwan's poor stock performance has given the country its lowest stock valuations ever.

The Datastream Taiwan Index has a price-to-earnings (P/E) ratio of 12.8, which is well below the Datastream China Index's P/E of 20.9 and the Datastream U.S. Index's P/E of 17.7.

According to Stansberry's quant analyst, Ian Davis, of all the indexes in the Datastream database, Taiwan is the cheapest major stock index in the world when you compare its current median P/E, price to book, and dividend yield with its own historical norms.

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. And 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, too. 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.

Since Ma's election, China has reportedly withdrawn half of the missiles it had pointed at Taiwan... And next month, the first direct flights will connect Taiwan and China. Taiwan will allow 3,000 Chinese tourists to visit every day. That's a big deal. According to Goldman Sachs, tourism may add about 60 to 80 basis points (0.6%-0.8%) to Taiwan's economic growth.

It's still illegal for Chinese investors to invest in Taiwan... or 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...

Taiwan's new president knows tying his country economically to China is the best way to prosperity. Opening Taiwanese stock markets to mainland investors is a way to do this. Wu Rong-I, chairman of the Taiwanese stock exchange, says these elections should "pave the way for an agreement with Beijing to ease such restrictions."

Mainland Chinese investors have $2.3 trillion in savings. To date, they haven't been able to invest this money outside China or Hong Kong. If they lift these trade barriers, Taiwan's stock market will soar...

The last time Taiwanese and Chinese politicians made progress, you could have made 990% in three years.

I'm not predicting another 990% gain in the Taiwan stock market this time around. But Taiwan is cheap. There's a catalyst. I think we could easily see a double in Taiwan's stock index...

This article was written by Tom Dyson for the daily investment letter The Daily Wealth.