Betting on a potential presidential election driven rally and cheap valuations, Citigroup Global Markets said it retains a positive view on the financial sector.
"With the presidential election coming up in nine months' time ... we think that sentiment would turn positive in light of [the presidential candidates'] promises of banking reforms and further opening up to China," although implementation of these promises were usually a disappointment after the elections, Bradford Ti (鄭溫煌), an analyst at Citigroup Global Markets, said in a report released on Friday.
An analysis of 13 large-cap domestic financial stocks showed that elections provided a boost to stocks in 2004, with share prices prior to the elections in March 2004 rising an average of 20 percent from December 2003 and 54 percent from July 2003, Ti said.
The financial sector's rise led the benchmark TAIEX's rally to a near seven-year high of 8,573.64 last Friday. The financial sub-index posted a 2.8 percent increase, outpacing the index's 1.45 percent rise that day.
Foreign institutional investors bought a net of nearly NT$23 billion (US$694 million), mainly in insurance and securities stocks, including Polaris Securities Co (寶來證券), SinoPac Holdings (永豐金控), Fuhwa Financial Holding Co (復華金控) and Cathay Financial Holding Co (國泰金控).
Life insurance stocks were steady performers, while securities brokerage stocks moved up later in the cycle, Ti said.
While many investors remain skeptical about banking stocks' performance, Citigroup reiterated its rising interest in Taiwanese financial stocks, citing "overly low valuations" and betting on a cyclical recovery providing support to valuations and better politics driving sentiment into the second half of this year.
The US equity research house recommended Fuhwa Financial, which owns the nation's largest brokerage; Cathay Financial, which operates the nation's biggest life insurer; and SinoPac, with its securities arm and aggressive move to expand overseas.
Meanwhile, Nomura Securities Co said it preferred insurance plays over banking stocks after the Legislative Yuan last week approved a measure to raise the cap on overseas investment by 10 percentage points to 45 percent of an insurance company's working capital.
The relaxation will benefit the insurance industry, the Japanese brokerage said.
The lifting of the investment limit translates into an additional NT$700 billion in capital that can be invested in overseas markets, which offer higher potential returns than the home market, it said.
The insurance sector as a whole is expected to see an additional investment return of NT$160 billion to NT$240 billion, Nomura said.
The Japanese brokerage recommended large-cap insurance companies such as Cathay Financial and Shin Kong Financial Holding Co (
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