Stock market set for wild week

The nation's stock market is expected to become more volatile this week, due to foreign exchange fluctuations, rising crude oil prices and political concerns brought on by China's preparation to pass its "anti-secession" law, according to Allianz Dresdner Asset Management Group's Taiwan branch.

But the financial institute remains bullish about long-term prospects, predicting that the nation's benchmark index will reach 6,500 points after these short-term factors subside, it said in a report released over the weekend.

"The political issue cast a pall over the local bourse last week by dragging the TAIEX down slightly by 0.23 percent with relatively inactive daily turnover of around NT$80 billion on average ... and it will continue to keep the market stagnant this week," Allianz Dresdner said.

China's National People's Congress is scheduled to begin the review of the draft law tomorrow and to pass the bill on March 14. Although its exact contents are still unknown, it's believed that the law will provide legal grounds for the country to prevent formal Taiwanese independence, by force if necessary.

Passage the law could put pressure on companies that have large investments in China or rely on the Chinese market, the financial institute added.

Meanwhile, Allianz Dresdner also suggested that investors should shift their focus from the electronics sector, which has an uncertain outlook, to traditional industries such as plastics, chemicals, steel and construction, which benefit from rising raw material prices and the strengthening NT dollar. If they do so, investors could enjoy dividend yields of 5 to 6 percent, the institute said.

The nation's largest securities house, Yuanta Core Pacific Securities (元大京華證券) said last week that investors should switch their investment target from transport stocks that exhibit waning positive factors to financial stocks that have recently lagged.

"Since the recent market rally began prior to the Lunar New Year, the transportation sector has risen 12 percent, while the financial sector has risen just 3 percent," Yuanta Core Pacific's head of research Matthew Sutherland said in a report issued yesterday.

"We believe this divergence is not fundamentally justified and recommend switching from transport stocks into financials," he said.

The rise in transport stocks was largely driven by an improving local political climate bolstered by the meeting between President Chen Shui-bian (陳水扁) and James Soong (宋楚瑜), the successful Lunar New Year cross-strait charter flights and talk of direct cargo flights, the report said.

However, direct links are still fairly unlikely in anything other than a very limited form, which would have no real impact on transport companies earnings and thus valuations, the report said. Additionally, the sector's medium-term fundamentals are actually quite weak and new capacity and rising costs mean the sector's stellar growth is likely to come to an end.

Instead, the whole financial sector, particularly the life insurance division, is expected to benefit from rising interest rates, the report said, and rising asset prices also raises the value of loan collateral.

Other for the possible rise of financial stocks could be the Resolution Trust Committee Fund Regulatory Provisions bill, which will be back on the agenda in the next legislative session, consolidation activities and the government's reduction of holdings in public banks.

The securities house recommended buying a variety of financial stocks, including blue-chips Cathay Financial Holding Co (國泰金控) and Taishin Financial Holding (台新金控), as well as attractive takeover target Far Eastern International Bank (遠東商銀).