Fri, Jan 21, 2005 - Page 10 News List

Morgan Stanley advises caution

OUTLOOK Shares with earnings from the domestic market are expected to outperform, but investors should be cautious on tech stocks, a strategist said

By Joyce Huang  /  STAFF REPORTER

Morgan Stanley yesterday expressed a conservative view toward the performance of Taiwan's stock market and said investors should be cautious about tech stocks this year.

The trading range of the benchmark TAIEX may remain trapped between 5,500 and 6,500 points in the first quarter, before climbing to a high of 7,000 points in the second half year, Morgan Stanley's head of research told reporters at a briefing in Taipei.

Dickson Ho (何資文), Morgan Stanley's Taiwan strategist, attributed the investment bank's pessimistic view toward the TAIEX in the first quarter to concerns over corporate earnings, the reluctance of local investors to participate in Taiwan's stock market, and a further dip in the leading indicators for the G7 in the next three to six months.

However, potential positives that may bring new hope to the TAIEX later this year include further consolidation in the financial segment, an early recovery in the high-tech sector, improved cross-strait relations and significant cash inflows due to an MSCI re-rating of Taiwan in May, according to Ho.

He added that the local market's upside in the second half of the year hinges on the recovery of technology companies, whose return on equity (ROE) currently averages 14 percent. Shares of these companies may continue to suffer a risk of declining.

"As a result of declining growth portfolios, the valuation for tech is unlikely to return to the high level seen in 2002," Ho said.

But improved ROEs and a further reduction of employee bonus stocks will be key for local high-tech companies to see better valuations, he added.

Ho yesterday also illustrated how high-tech firms could alter their cash-dividend policies to help improve ROEs.

Citing the investment bank's simulation, Ho said that if high-tech companies increase their cash dividend payout to a goal of 60 percent -- from this year's estimated 33.4 percent and last year's 28 percent -- ROE would improve by 1.1 percentage points to 16.33 percent for this year and 1.6 percentage points to 16.3 percent next year.

High-tech firms with high net cash balances and positive free cash flow should increase cash dividend payouts to improve their ROEs, while those that prefer to carry excess cash should propose feasible expansion plans to attract stock investors, he said.

For this year, Morgan Stanley expects domestic-demand stocks to outperform high-tech stocks as a result of a strong New Taiwan dollar, rising -- but still low -- interest rates and opportunities in the domestic economy.

The bank recommends investors buy more stocks in the cement, glass, retail, telecom services and financial sectors.

In terms of share selection, due to uncertainties over local economic development, political tensions and tougher accounting standards, "a flight to quality with an emphasis on high dividend yields" remains key, Ho said.

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