Investors are still cautious about local financial and insurance shares amid widespread pessimistic sentiment in global financial markets, which is likely to continue through the first quarter of next year, analysts said.
With the recent sell-off, the nation's financial and insurance sub-index fell 12.32 percent to 940.37 on Friday, from 1,072.42 on Nov. 1, Taiwan Stock Exchange data showed.
For the month to date, foreign institutional investors sold a net 1.18 billion shares in this sector, forcing the foreign shareholding ratio to drop to 19.41 percent on Friday from 20.2 percent on Nov. 1, stock exchange data showed.
"Uncertainties on CDO [collateralized debt obligation] exposures, rising interest rates and implementation of the personal bankruptcy law will be headwinds to a cyclical recovery into the first quarter 2008," Citigroup's research team said in an investment note released on Friday.
As foreign investors have been redeeming their portfolio investments in local shares in a bid to deal with the need for liquidity in home, market shares of major financial holding companies such as Cathay Financial Holding Co (國泰金控), Shin Kong Financial Holding Co (新光金控) and Chinatrust Financial Holding Co (中信金控) experienced a continued sell-down in the past few weeks.
While talks of an election-triggered share rally could provide a driver of upside momentum for financial shares, Citigroup remained conservative about such expectations.
"Any election-driven rally might happen either close to or even after election results," Citigroup analysts Bradford Ti (
The researchers also said investors remained skeptical about life insurance shares, although several local life insurers had reported handsome first-year premiums for this year.
"Despite continued growth in first-year premiums, focus remains on CDO/CBO [collateralized bond obligation]/SIV [structured investment vehicle] exposure," the Citigroup analysts said in the note.
First-year premiums are expected to account for more than 70 percent of Taiwanese life insurers' total income this year, as the major players have gradually shifted their focus to interest-sensitive and investment-linked products from traditional products, Fitch Ratings Ltd said in a report released on Tuesday.
While concerns on future earnings amid global financial uncertainties remain intact, Citigroup said it expected first year premiums to increase between 7 percent and 9 percent, with a 5 percent growth in investment yield for the next two years.
The US brokerage favored Cathay Life Insurance Co (國泰人壽), a major profit generator for Cathay Financial, over Shin Kong Life Insurance Co (新光人壽), which is under Shin Kong Financial because the former has "a more defensive balance sheet," it said.
But Fitch said it expected the recent volatility in the equity market to affect the demand for variable universal life products and potentially lead to lower new premium flows for the remainer of this year and through next year.