JuifangStocks fell yesterday after the Standard & Poor's (S&P) Ratings Services' revision of its sovereign outlook on Taiwan on Tuesday from stable to negative.
"The S&P downgrade was a big shock to foreign investors who worry that the nation's outlook may be further downgraded, thereby hurting future stock performance if no improvements are made," said Alex Huang (黃國偉), vice president of the research department at the Barits International Securities Co (倍利國際).
The downgrade was based on concerns about growing cross-strait tensions, expanding government debt and declining fiscal flexibility.
Huang expects the impact of the downgrade "may remain a one-day shock," saying that foreign investors did not panic too much, given the better-than-expected net sale of US$6.5 billion worth of stocks yesterday.
The TAIEX dropped 46.14 points, or 0.79 percent, to end the day at 5,798.62, with a turnover of NT$52.89 billion.
In tandem with an expected economic slowdown next year, Huang predicted that the TAIEX will remain flat in the near future and hit the bottom in the second and third quarters of next year before rebounding.
"Traditional-industries shares will outperform electronic shares next year," Huang told a stock outlook presentation yesterday.
According to Huang, an excess of capital next month may push the TAIEX up to around 6,600 points in the first quarter before dropping to around 5,700 points between the second and the third quarter.
Textile shares were the only sector that advanced yesterday.
Huang said traditional-industry sector, including textiles, will retain a positive momentum until the first quarter next year and then decline in the second half of the year.
But Huang also expects the traditional shares to eventually recover since the second half of the year is usually their busiest season.
As for electronics shares, he urged investors to refrain from making too many investments since the sector may suffer from a cyclical depression, with demand on the wane as a result of declining expenditures triggered by rising oil prices.
"Big companies, who enjoy competitive advantages, will survive while smaller players may be edged out of the market [next year]," the brokerage said in a report.
Meanwhile, prices of financial shares, which had been through a 12-year recession and recently bottomed out, will be bolstered as a result of rising interest rates.
"Foreign investors' confidence in financial shares remains strong and there's still room for foreign investors to pick up shares," Huang said.
He said foreign investors will invest more if the government's financial reform efforts pay off.