Practical and effective Kuomintang leadership under Ma Ying-jeou is expected to help deepen cross-Strait ties and set Taiwan back on course for a long wave of economic prosperity.

In our view, the Taiwanese stock market can look forward to at least three strong years ahead.

Compared with most other regions, which have already seen domestic growth, Taiwan stands at the beginning of an improved medium term growth path, with the hopes now resting on the new government.

The potential benefits for Taiwan from greater cross-Straits activity are enormous. Of the sectors where existing restrictions could potentially be relaxed, the tourism industry could see the most immediate impact.

The banking sector also has scope for major benefits as there has been growing optimism about the potential for Taiwanese banks to open operations on the mainland.

We also expect reduced flight times to and from the mainland to provide the catalyst for an upturn in the property market as this will encourage more expatriate Taiwanese businessmen to buy property in Taiwan.

Heading south, prime high-end property prices in Kaohsiung - the second-largest city in Taiwan - cost about HK$2,000 per square foot, which is actually cheaper than Ho Chi Minh city in Vietnam. We see Kaohsiung is likely to be an investment target by both Taiwanese expatriates and Hong Kong investors.

Many Taiwanese companies and foreign investors have been positioning themselves in the commercial property market.

Furthermore, there is over $400 billion of Taiwanese capital in investment abroad. As a result, we expect that a significant portion of the capital outflows from Taiwan in recent years will be reversed and that the inflows recorded in the first quarter of 2008 are only the beginning.

In addition, the new government has talked about increasing its infrastructure spending by TW$2.7 trillion over the next eight years. Despite concerns about a US recession, Taiwan's stock market and currency have significantly outperformed their regional peers so far this year.

This is mainly a reflection of the growing optimism within Taiwan, based upon improved cross-Straits relations and closer economic links with the mainland.

In terms of net inflows into our Taiwan Fund and the number of investors investing in the Fund, we have seen a strong rising trend for the last half year. Near term, we expect Taiwan's stock market to consolidate after the recent strong global and regional outperformance.

However, in the longer term, JF has confidence in the new administration, and sees Taiwan as offering a favorable risk/return ratio over a medium-term investment horizon in comparison to a number of other Asian markets.

That is why we recommend investors who share their views may wish to capitalize on this investment opportunity by adding Taiwan funds to their portfolios.

The author is head of Investor Communications of JF Asset Management.

(HK Edition 05/30/2008 page3)