After eight years of relative silence, TaiwanÆs markets are roaring again. Almost overnight, the island has become AsiaÆs best performer with the stock market increasing by 9.7% since the beginning of the year. This compares to declining performance in other regional markets û the MSCI Asia index is down by 4.8%, the Hang Seng is down by 13.1%, Singapore by 2.3% and Korea by 7.9%.

Some say TaiwanÆs outperformance is directly related to the arrival of a new government headed by president Ma Ying Jeou. Ma officially began his term on Tuesday this week.

Peter Tang, investment manager at JF Asset Management, says MaÆs inauguration has marked a turning point for TaiwanÆs economy. In the run up to MaÆs inauguration, JFAM recorded a 98% jump in fund inflows on its Taiwan portfolio. Tang says investors are optimistic that the new government will stick to its election promises of rebuilding relationships with neighbouring economies, particularly China, and spending heavily on new infrastructure.

With his feet barely in the door, Ma has already pledged to cut inheritance tax, resume direct flights to China and spend NT$4 trillion to renew the islandÆs infrastructure. Over the coming eight years, the Taiwanese people will see new high-speed railways, airport extensions, toll roads, highways and township projects.

Many of these projects will be undertaken to encourage tourism from the mainland. Tang says it makes sense for a China-stimulated recovery to begin with the tourism sector. After all, the National Palace Museum in Taipei houses more Chinese artefacts than the Great Wall of China and the Forbidden City put together. Tourists are also likely to be attracted to the therapeutic waters of Yilan, the Chinese cuisine in Taipei and the Sun Moon Lake.

Tang compares the current situation in Taiwan to Hong Kong in 2003. Next to tourism, a comeback in domestic consumer confidence will also boost markets. Tang says the Taiwanese need to quit hoarding cash and start spending again. The government also needs to encourage Taiwanese nationals to invest at home. For many years now, a large proportion of locals have sent their money offshore to centres such as Hong Kong and Singapore. More recently they have re-located their investments and their businesses to China where an estimated two million Taiwanese, or 10% of the islandÆs population, now lives. Tang hopes the improved economic outlook and lower tax rates at home will see these nationals repatriate some of their assets.

Tang expects Taiwan to continue to trade at a price-to-earnings ratio of 13x to 14x for the rest of the year. He suggests allocating more to non-tech sectors such in infrastructure, financials, and asset plays such as airlines and property developers. He also likes selective high-quality names in the TFT manufacturing area.

Financial and real estate companies are benefiting from the rare situation in Taiwan where cheap finance has depressed spreads, where yields are improving and where sales figures are rising. This sector will be the first to benefit from the first wave of investments returning from overseas, says Tang.

Tang casts a three-year optimistic outlook for Taiwan. He says Taiwan should be viewed by investors as a cheap China play, but says they should also be mindful of the risks. For one, the recent rally has led to selective profit taking, and a market correction is already underway. He advises caution and an overweight holding in cash until the correction plays out.

Higher labour cost in China and steepening spreads between the renminbi and the local currency, meanwhile, could spell profit difficulties for more small- to mid-cap companies this year. Tang cautions investors to stay away from these companies as they will soon face tougher regulatory standards in the mainland and will find it more difficult to reconcile the cost transfer.

Inflation, while less serious than in China, is still an issue for Taiwanese corporates. Under former president Chen Shui BienÆs eight-year reign, the government installed price controls on utilities and commodities from oil, water to electricity. These will require readjusting under the new government and, as a result, inflation is likely to rise.