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Merrill Lynch says Taiwanese stocks now a risky punt

Merrill Lynch & Co recommended investors cut holdings of Taiwanese stocks as protesters supporting the opposition party demand a recount of the presidential election, in which President Chen Shui-bian (陳水扁) won a second term.

Spencer White, Merrill's regional equities strategist, cut Taiwan's recommendation to "market weight" from "overweight," in a report released late on Monday.

"We expect the Taiwanese equities to consolidate over the next quarter as the market digests the ramifications of the election result," White wrote in the report. "I see little opportunity for upside surprises in either earnings or liquidity."

ABN Amro Asia Ltd and Morgan Stanley on Monday recommended investors switch to so-called defensive stocks such as Taiwan Cellular Corp (台灣大哥大), Chunghwa Telecom Co (中華電信) and financial-related companies after the TAIEX slid 6.7 percent, its biggest drop in eight years.

The TAIEX had climbed 18 percent this year through Friday, making it the sixth-best performer among the world's 59 biggest benchmarks in that time, according to Bloomberg data.

"You may continue to see a bit of weakness until this whole situation is resolved," said Eswar Menon, who helps manage US$250 million at Loomis, Sayles & Co in San Francisco. "In the Taiwanese market, clearly the government does play a role."

Menon said he wasn't selling his holdings of Taiwanese stocks such as United Microelectronics Corp (聯電), adding that he may buy should share prices fall further.

White said there were better opportunities in Hong Kong stocks, which he raised to "overweight" from "market weight." He said the prospect of an appreciating yuan and improved economic growth in Hong Kong made the city's stocks, particularly property companies, better investments.

Hong Kong's Hang Seng Index recently rose 0.6 percent to 12,620.47. Sun Hung Kai Properties Ltd (新鴻基地產), Hong Kong's biggest developer by market value, advanced 1.4 percent to HK$70.50.

"Hong Kong's investment appeal just gets better," White said in his report.

ABN Amro recommended holding stocks such as Taiwan Cellular and Chunghwa Telecom because both phone companies yield 7.2 percent in dividends, the broker said in a research report. The TAIEX yields about 1.7 percent.

Taiwan Cellular shares added 4 percent to NT$31.30, while Chunghwa Telecom gained 2.7 percent to NT$56.50 on the TAIEX yesterday.

Taiwanese financial-related shares led gains among stocks that rose on the local bourse. Cathay Financial Holding Co (國泰金控), which yields about 2.5 percent, climbed 4.4 percent to NT$60. Fubon Financial Holding Co (富邦金控), which returns 3.6 percent, rose 3.4 percent to NT$33.40.

Morgan Stanley said the TAIEX may drop as low as 5,800 in coming weeks, without specifying the time frame further.

"Assuming the political unrest is not prolonged, we recommend investors to accumulate shares on weakness, with a focus on the financial sector," Morgan Stanley said in a report.
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