Quite a few of us have had good cause to celebrate the Asian boom in the last couple of years. Anyone who put any money into a typical Asian investment trust three years ago has easily doubled his stake – and one or two national markets have done even better. India’s main stock market index gained more than 24 per cent in the first five months of 2006, bringing its overall growth since March 2003 to a colossal 300 per cent! China and Pakistan are on the move again after a bumpy 12 months, and some Indonesian funds have made 100 per cent in the last year alone. You don’t get those kinds of returns from the building society.

What’s more, you’ll hear a lot of people telling you that we’re going to see even more explosive growth in the coming six months. Asia is still roaring ahead, they say, and with investors starting to shun the dollar there’s every chance that it’ll carry on attracting new money for a very long time to come.

But others aren’t quite so sure. This year, more and more senior analysts have been daring to voice the unspeakable doubt. Asia probably has had its day, they say – for the time being at least. Valuations are too stretched at these levels, they think; and, if a really big scare should ever strike, the banking systems in many of these developing countries might not be strong enough to support their stock exchanges. Only a sizeable fall in prices will bring Asia back on target, they reckon. At the moment it just isn’t worth the risk.

But there’s one Asian country whose stock market is still growing strongly, with plenty of room for more growth. Its economy is growing at 6.5 per cent a year, putting it close to China and India and more than three times as fast as Japan. At $260 billion, its foreign exchange reserves are bigger than Hong Kong’s and India’s put together. Its industries turned out 14 per cent more goods last year than they did in 2004. And its currency is utterly rock-solid, with an inflation rate of just 0.4 per cent and with bank lending rates averaging around 1.7 per cent a year.

Taiwan is one of the world’s most overlooked investment markets. These days we’re all so charmed by the lure of its big neighbour China that few of us spend very much time contemplating this sizeable little island (also known as Formosa, or, sometimes, to China’s irritation, “the republic of China”). But times are changing. After a steep tumble in the opening months of the year, the main Taiwan weighted stock market average has put on a sudden 15 per cent surge to bring its year’s growth up to 12 per cent by the start of May. At the time of writing it was pushing ahead by 3 per cent a week! And there seemed no obvious reason why it should slow down. Taipei has a lot of catching up to do.

Why has it taken Taiwan so long to attract our attention? Partly, of course, because America’s new-found friendship with mainland China has left Taipei a little bit on the sidelines. Partly because China still comes out with the occasional burst of aggressive talk against its arch-enemy: political spats about oil and local fishing rights have a habit of turning into gunboat talk, which isn’t what Taipei’s foreign investors want to hear at all.

We’ll look at these changes in a moment. But in the meantime, what does Taiwan actually do?

Well, that’s a better question than it sounds. Taiwan has become so used to being self-sufficient over the years that we wouldn’t even recognise a lot of the consumer brands that are making it big in Taipei. (Fifty-five years of economic blockade by communist Beijing were bound to have left some sort of a mark.) But we’re all familiar with Taiwan’s considerable expertise in making computers, and especially computer components. There’s a good chance that half the parts in your PC – the modem, the screen and the motherboard, for starters – came from this tiny island. Taiwan Semiconductor, Mitac International and Chunghwa Telecom rank among the world’s most prominent companies within their various sectors.

But by far the biggest companies in Taiwan are the state-owned Chinese Petroleum and Taiwan Power, whose $30 billion annual sales feed a huge chemical and petrochemical industry. Taiwan also builds its own brands of cars, trucks, railway locomotives and ships. Not to mention a massive quantity of home-grown food products. Well, that’s what you get when you build a fortress state in need of complete self-sufficiency!

Taiwan has been forced by the World Trade Organisation to abandon some of its long-standing restrictions on imported goods since it joined in January 2002 – meaning that foreign companies are starting to find it easier to market their products in Taipei. And there aren’t quite so many limits on foreign ownership as there used to be. Most private-sector companies allow up to 49 per cent foreign ownership (about the same as India) – although it’s down to just 40 per cent for Chunghwa Telecom, because the government still has a large stake in the company.

Not everybody is happy with the pace of economic liberalisation in Taiwan, and there have been plenty of complaints about how long the deregulation process is taking. For instance, Taiwan still imposes massive restrictions on food imports from mainland China – just ask Tesco, which pulled out of Taiwan last year complaining that import restrictions were ruining its local operations.

But, from an investor’s point of view, these sorts of irritants aren’t necessarily a bad thing. If you buy shares in a country that’s finished its liberalisation programme, the chances are that you’ll pay full whack for everything in your portfolio. But if you’re confident that the promised package of reforms is really going to take place at some time in the future, then you’re in with a much better chance of bagging a bargain. That, I think, is where we are now with Taiwan.

Are Taiwanese stocks expensive? Well, it depends on your standards. At present you’ll pay a price/earnings multiple of about 15.5 on top-line companies –which is another way of saying that the price you pay represents about fifteen and a half years’ pre-tax earnings at their current level. That compares with a p/e of 15 in Britain or Germany, 19 in America and a much more expensive 37 in Japan.

More importantly, for some investors, is the high dividend yield. Large Taiwanese companies routinely deliver an average 3.5 per cent on your investments, compared with 1.7 per cent in America, 1.3 per cent in China or 2.8 per cent in Britain. Obviously that’s only going to be a comfort for as long as the Taiwanese dollar remains solid at around 60 to the pound. But with inflation levels down around 0.4 per cent, the prospect of a currency slide shouldn’t be a major worry.

How do you get into the Taipei market? Well, as we’ve seen, you won’t find it too difficult to find world-class companies if you fancy going in directly. Larger Taiwanese companies invariably issue their reports in English as well as Chinese, and the better British business newspapers will keep you up to date with major events. The Taipei Times (www.taipeitimes.com ) has a decent business section. Or try the Taipei stock exchange’s own site at www.tse.com.tw/en.

On the whole, though, you’ll be better off going in through an investment trust rather than trying to do your own share-picking. But it’s unlikely that you’ll be able to find a 100 per cent Taiwan-focused fund. Barings Asia Pacific fund has 23 per cent of its portfolio invested in Taipei, and it’s returned 55 per cent in the 12 months to the start of May – and 129 per cent over 36 months! Schroder Asia Pacific has 18 per cent of its money in companies like Taiwan Semiconductor and grew by 47 per cent in the year to early May.

Finally, a wealth warning. Whatever you do, don’t invest any money in Taiwan, or any other emerging market, unless you can afford to sit it out during the bad times. As I’ve explained, Asia’s stock markets are probably set for a period of uncertainty, and we can’t really predict which way things will go in the short term. In the longer term, however, Taiwan looks like a solid prospect.

This article is from the June 2006 issue of What Investment.