FALLS CHURCH, Va.–It’s been sixty years since China and Taiwan held an official meeting of any kind. But last weekend, Taiwan’s vice president-elect Vincent Siew enjoyed first-class treatment on the mainland.

During The Boao Forum for Asia’s (BFA) recent annual conference in southern China’s Hainan Province, Siew found himself in an honored place among the heads of state and businessmen in attendance. At the conference’s opening event, Siew was seated next to former US Secretary of State Colin Powell, the closing ceremony’s keynote speaker. And Chinese President HU Jintao invited Siew to sit next to him during the dinner banquet.

There’s much skepticism about China’s and Taiwan’s ability to create a better relationship, even after the Kuomintang (KMT), which has advocated stronger ties to the mainland, won a decisive victory in Taiwan’s recent presidential election. But China’s leadership wasted no time capitalizing on an opportunity to express its welcoming stance.  

This is the change Taiwan needs more than anything else right now. As I noted in January: 

Taiwan isn’t in position to survive economically without China’s assistance. This reality is just now being recognized, and the political parties are expected to act accordingly. As in South Korea, economic development is taking precedent over extreme nationalistic policies.

An eventual understanding between Taiwan and the mainland–Beijing has indicated its willingness to talk to a responsible government–will help Taiwan’s economic development. Increased foreign direct investment (FDI) will flow to the island, just as China did with Hong Kong 20 years ago.

People present at the meeting reported that Siew raised several proposals to improve the cross-straits relationship directly with President Hu, including facilitating direct charter flights and increasing the cap on mainland visitors to Taiwan. These are among the easiest obstacles to clear, but their resolution will have immediate impact for Taiwan– especially Taipei–because a new world of development will open up for the lagging local economy.

Tourism will pick up, sparking hotel- and resort-construction booms. Taiwan’s tourist industry has suffered lately, and it represented just 1.4 percent of GDP in 2006; meanwhile, Hong Kong’s tourism industry contributed 8.1 percent to the Special Administrative Region’s GDP, with mainland tourism the driving factor.

Mainlanders and Taiwanese businessmen working in China will be tempted to buy property in Taiwan once certain restrictions regarding free movement of capital are lifted. This should revive Taiwan’s property sector. Credible reports indicate investment companies and high-net-worth individuals have already started buying into Taiwan’s high-end property market (always the first part of the market to move) in anticipation of the opening up to China.

We’ve made successful Taiwan recommendations during the past couple years. I recommended selling our last stock, Chunghwa Telecom (NYSE: CHT), for a 50 percent profit about a month ago. I also recommended buying iShares MSCI Taiwan (NYSE: EWT) in January, and we’re up 23 percent in that still-open position.

Taiwan has been the best-performing major market in the world this year, rising 14.2 percent in US dollar terms. But the market still looks attractive, trading at a discount to the rest of the region on price-to-book value terms while offering a 4.3 percent yield.

China won’t save Taiwan from the slowing cycle the global economy is entering, and we’re still early in the integration process. But if both governments develop this new relationship productively, Taiwan will be one of the best investment stories in the world for years to come.

Because the Silk philosophy is based on identifying the best long-term stories, I continue to recommend investing in Taiwan. Buy Taiwan.

Russian Earnings

Alternative Holdings Portfolio denizen and long-term favorite Lukoil (OTC: LUKOY) reported a 300 percent increase in fourth quarter 2007 profit on higher prices for crude oil and refined products.

Revenues were up 52 percent year-over-year to USD24.8 billion, and net income rose 200 percent to USD3.1 billion. Operating cash flow was USD3.4 billion for the quarter. The environment was certainly favorable for Lukoil, but the company also cut costs.

The two most interesting points in the company’s presentation were management’s assessment of benefits accruing to Lukoil from Russia’s tax-system changes and its outline for increasing its refining and gas business.

Lukoil expects to pay USD870 million less in taxes if the proposed tax reductions for the energy sector go through. Russia’s Energy and Industry Minister Viktor Khristenko said recently that agreements between his ministry and the Finance Ministry on the need for tax cuts for the oil industry have been reached. A formal proposal should be ready in a couple months.

If such a proposal becomes reality–and there’s no reason it shouldn’t–Russian energy companies will begin to reflect their true value, and their stocks should move decisively higher. 

Refining is an increasingly important part of Lukoil’s business; this sector of the industry has the full support of the government and is taxed on favorable terms. Increases in refining capacity are needed in Russia and Eastern Europe, and Lukoil is determined to fill the gap by investing USD1 billion in the first phase of its expansion.

Russia is my favorite market for 2008, and I’ve identified several opportunities in which you should invest. Buy, in order of preference, GAZPROM (OTC: OGZPY), Mobile TeleSystems (NYSE: MBT), LUKOIL and Vimpel-Communications (NYSE: VIP).

The V system

This week I’m introducing the Silk Volatility System, a simple way to identify which Portfolio stocks are more volatile than others. The system is based on beta calculations, and each stock is compared to the market in the region it calls home.  

A stock with a beta of “1” or higher is categorized as volatile. A stock with a beta below “1” is less volatile. In the portfolio tables, you’ll see the notation “V” next to each stock with a beta greater than 1.

The most volatile stocks in the Long-Term Portfolio are:  

• China Infrastructure Machinery (HK: 3339, OTC: CIMHF)
• China Mobile (HK: 941, NYSE: CHL)
• Keppel Corp (OTC: KPELY)
• Mobile TeleSystems (NYSE: MBT)
• Yanzhou Coal (HK: 1171, NYSE: YZC)

The most volatile stocks in the Alternative Holdings Portfolio are:

• Alibaba.com (HK: 1688, OTC: ALBCF)
• Ayala Corp (OTC: AYYLF)
• LUKOIL (OTC: LUKOY)
• Melco PBL Entertainment (NASDAQ: MPEL)
• Sinopec (HK: 386, NYSE: SNP)
• Vimpel-Communications (NYSE: VIP)

Cambodia based Naga Corp (HK: 3918, OTC: NGCRF) merits special mention. Although Naga has a low beta compared to the rest of the region, it does carry the risk inherent in a truly emerging market.

It’s the only company investors can own in Cambodia, and, given this country’s turbulent political past and the fact that it’s still in its early stages of economic development, you should be aware of the risks such an investment entails.

That said, Naga remains the perfect way to get exposure to an exciting, pure emerging market opportunity where the rewards can be substantial. See Silk, 5 March 2008, Holiday in Cambodia, for an in-depth discussion. Naga remains a buy.

As always, I prefer the local shares–when we can get them–to the over-the-counter (OTC) listing. And because Hong Kong is easily tradable through serious brokers in the US, I strongly recommend you buy the stock locally.

Fresh Money Buys

The investment process is constant. So if you’d like to add to your positions in portfolio recommendations or allocate new funds in a diversified way, focus on the following markets, in order (for both countries and sectors). Consult the portfolio tables for details.

• Russia (energy, telecommunications)
• Hong Kong (banking, real estate, infrastructure)
• India (pharmaceuticals)
• Philippines (telecommunications, real estate)
• Singapore (banking, telecommunications, industrial)
• China (consumer, telecommunications, machinery, oil, e-commerce, coal)
• Taiwan (ETF)
• South Korea (banking)
• Japan (banking)
• Cambodia (casino/hotels)
• Macau (casino/hotels)