Fri, Feb 02, 2007 - Page 12 News List

Equities to fall: Deutsche Bank

BEARISH OUTLOOK Bank analyst Krista Yue predicted a downturn this quarter, but said there was potential for a dramatic upswing in the second half of the year

By Amber Chung  /  STAFF REPORTER

The nation's equity market is expected to experience a downturn before the end of the quarter, followed by a rise to as high as 8,700 points in its benchmark index in the middle of the second half of the year, implying a double-digit return this year, a Deutsche Bank analyst said.

"We expect to see more than a 5 percent correction [in the benchmark index] from the current level this quarter," Krista Yue (余婉文), head of Taiwan Equity Research at Deutsche Bank, told a press conference yesterday.

The downturn was predicted because of overly optimistic expectations for earnings in the first half, the unlikelihood of US interest rate cuts in the first half that would boost capital momentum, and the expected continuation of China's financial tightening policy, Yue said.

The TAIEX yesterday added 1.9 points, or 0.02 percent, to close at 7,701.54, ending a five-day decline of some 3 percent.

The TAIEX is predicted to hit 8,700 at the end of third quarter or the beginning of the fourth quarter, representing a 12 percent potential capital appreciation plus 4 percent dividend yield, Yue said.

The analyst also said there was potential for an upswing in the second half of the year on recovery in fixed investment spending spurred by sustained low interest rates and increased corporate confidence in the 2008 outlook, which should help drive another year of healthy 15 percent growth in earnings per share.

Deutsche Bank identified four investment themes for this year, including increased capital management initiatives that should drive higher cash dividends; share buybacks; special payouts; and consolidations, mergers and acquisitions in the high-tech sector driven by rising pricing pressure and growing private equity interest.

The German bank expected the nation's central bank to cut interest rates in the middle of this year, thereby helping to drive more funds into the stock market.

Taiwanese companies' high exposure to China's strong economy -- whose growth is estimated at 9.5 percent this year -- is also one of the investment themes this year, Yue said.

The bank said it favored an overweight in technology and industries, was neutral on financials and telecommunications, and underweight in materials.

The bank favored PC makers whose earnings visibility remained the best, while DRAM suppliers were also a direct beneficiary of PC pickup and currently trading at attractive valuations, Yue said.

In the financial sector, despite a strong turnaround in banks' headline profits this year because of shrinking bad debt reserves from the previous year, a share price upswing could be limited as a result of weak credit demand and continued pricing competition, she said.

Consolidation in the banking sector would happen on a small scale, with small local lenders of weak financial structure being taken over by foreign private equity funds, Yue said.

She also added that a policy change allowing Taiwanese banks to break into China's market was unlikely this year because of the legislative and presidential elections at the end of this year and early next year, but a relaxation of cross-strait relations could come within two years.

Meanwhile, Lim Chew Hwee (林猶偉), Asia Strategist at Barclays Investment Services Group, said yesterday that Barclays favored Taiwanese banks, as they were trading at 1.2 times their book value, which was the cheapest in Asia.

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