Merrill Lynch forecasts Q3 rebound

The weak stock market may rebound in the third quarter, led by electronics shares and followed by financial shares, a foreign financial management and advisory company said yesterday.

"We are expecting the TAIEX to rebound in the third quarter as investors were overly pessimistic and excessively depressed some stocks," Sophia Cheng (程淑芬), director of Merrill Lynch Taiwan Ltd, said at a press conference.

"Now we have finally seen signs of the rebound, as some overseas clients are picking stocks with good long-term perspective to buy," Cheng said.

But the company would not forecast the range of the rebound.

The TAIEX yesterday gained 175.24 points to close at 5,602.99 on a turnover of NT$99.37 billion. Foreign investors bought a net NT$10.59 billion of shares.

Following a rebound in electronics shares, financial shares, although impacted by the sagging market in the last quarter, are expected to remain stable through the end of the year, Cheng said.

Petrochemical, shipping and construction stocks will also improve in the third quarter due to strong seasonal demand, she added.

Rising oil prices, rising interest rates and China's macroeconomic policies are all factors that Cheng said might influence the TAIEX's recovery, although these factors put no imminent pressure on the local bourses.

Cheng said she was concerned that the sustained hikes in oil prices may trigger stagflation following the shoot-up of consumer price index, but she stressed that such a scenario would happen only when oil prices go as high as US$60 per barrel.

She also shrugged off possibilities that the central bank would raise interest rates in the near future, because the economy is improving.

Even so, a major element that would affect the movement of the TAIEX beginning in the last quarter of the year is the cross-strait relationship, especially if the Democratic Progressive Party becomes the majority in the legislature after the year-end elections, she said.

Commenting on the electronics industry, Tony Tseng (曾省吾), vice president of Merrill Lynch Taiwan, said notebook and component manufacturers may see good performance starting next year once new models and products hit the market.

Jeffrey Su (蘇志凱), another vice president who watches the thin film transistor LCD (TFT-LCD) industry, said the sector should be cautious about the drastic drop in panel prices, which have slid by over 20 percent since June.

The cut-throat price wars launched by South Korean and Taiwanese manufacturers only resulted in sluggish orders, as customers are waiting for prices to stabilize, Su said.

Blessed by strong demand from China, traditional industries, including auto, steel and raw materials have enjoyed fairly good growth this year, and the momentum will keep driving the sectors through next year, said Nick Lai (賴以哲), associate vice president of Merrill Lynch Taiwan.

Meanwhile, Cheng suggested the government try to carry out large-scale financial reform between next year and 2007, especially the merger of banking institutions.

"There are no major elections to be held during the period, meaning that the government has fewer burdens in carrying out such policies," Cheng said. "The faster the government completes the reform, the better the nation's financial development be."