Citigroup Inc yesterday raised its 12-month index target to 12,000 points, citing strong liquidity and expected easing in China trade policy as the election approaches.
The upward adjustment from 9,550 points was driven by strong local buying momentum in addition to continued foreign buying, Peter Kurz, head of Taiwan equity research at Citigroup Global Markets, said in a research note yesterday.
Since the beginning of the month, local institutional investors had bought a net NT$60.13 billion (US$1.83 billion) of Taiwanese stocks, compared with NT$12.69 billion last month. In contrast, foreign investors' net purchase of NT$26.87 billion during the same period was down from NT$185.17 billion last month, Taiwan Stock Exchange's data showed.
Kurz, dubbed Mr. Taiwan in light of his extensive experience in the local market, said politics remains a key driver of local stocks.
The presidential elections next March bodes well for liberalization measures, such as reducing restrictions on investments in China, as well as opening cross-strait banking and direct flights, as these policies are now being adopted by candidates of both parties, he said.
An estimated US$70 billion in new funds could flow into the stock market in anticipation of these changes, which could drive the index higher even before the elections, Kurz said.
Part of these new funds is the backflow of nearly US$170 billion that flowed out of the nation over the past five years, he said.
However, limited upside in valuations could be a looming problem.
"Valuations are no longer cheap," Kurz said, citing Taiwanese companies' high price-to-earnings ratio.
The P/E ratio represents the relationship between a company's share price and its earnings per share. It is one of the measures used by investors to gauge how cheap or expensive a stock is.
Kurz put Taiwanese companies' average P/E ratio at 19.4 times for this year and 19.8 times next year after factoring in employee share bonus dilution.
"A number of companies do, however, offer good value," Kurz said, adding that the US brokerage likes domestic demand sectors, such as life insurers, companies with rich land assets and retail plays, as well as chip testing and packaging services providers and PC component suppliers.
Citigroup listed its seven top investment targets, which include Formosa Plastics Corp (台塑), Siliconware Precision Industries Co (SPIL, 矽品精密), Shin Kong Financial Holding Co (新光金控) and Far Eastern Department Stores (遠東百貨).
Formosa Plastics closed down 4.11 percent to NT$81.60, SPIL was down 5.3 percent to NT$60.70, Shin Kong dropped 6.4 percent to NT$38 and Far Eastern Department Stores fell 2.1 percent to NT$28.5 on the Taiwan Stock Exchange yesterday.
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