Despite the nation's benchmark stock index ending the year with a seven-month-high on Friday, in-vestors will need to stay alert this year, as the downgrade cycle is expected to linger throughout the first half of this year, according to a local securities house.
"The TAIEX has not yet reflected downgrades to date, thanks to liquidity, MSCI [Morgan Stanley Capital International], election stimulus and year end window dressing," Yuanta Core Pacific Sec-urities (元大京華證券), the nation's largest securities house, said in a report released last week.
"Our index target for the next six months is 5,000," said Yuanta Core Pacific, which suggested in the report investors to be careful this year.
The TAIEX ascended by 38.83 points, or 0.64 percent, to 6,139.69 points on Dec. 31, hitting a seven-month high from May last year.
The company's bearish prediction came from their expectations for US consumer spending to weaken with higher household debt, rising interest rates, high oil prices, a lack of tax breaks and the declining US greenback.
The prices of many commodities, in particular steel and petrochemicals, would not dip until the second half after the cycle peaks in mid-year, the report said.
"All this means the current downgrade cycle is only about half over and is likely to continue throughout the first half, especially in technology, exporters and US dollar revenue stocks," the report said.
Yuanta Core recommended a "very underweight position" in the tech sector because of its exposure to US demands and the US dollar. The securities firm also holds a slightly underweight position in materials shares.
Domestic demand players and asset reflation players, such as property, banks, construction and telecom stocks, are favorable investment targets, it said.
Yuanta Core Pacific's top ten stock picks for this year include Taiwan Cement Corp (
Its top 10 least favorable shares include AU Optronics Corp (友達光電), Chi Mei Optoelectronics Corp (奇美電子), Powerchip Semiconductor Corp (力晶半導體), Lite-On IT Corp (建興電子), Compal Electronics Inc (仁寶電腦) and Compal Communication Inc (華寶通訊).
Compal, the world's second-largest notebook PC contract manufacturer, is also included in the three stocks to avoid along with Evergreen Marine Corp (
The US investment bank suggested investors to avoid technology stocks that are in a market with poor industry dynamics, such as excess competition, lack of pricing power and overly short product cycles.
"We are staying with long financials and broadening exposure to other beneficiaries of reflation, such as retailers that are sensitive to a rise in discretionary spending," JP Morgan said.
JP Morgan's top picks include Cathay Financial Holding Co (