On speculation that last week’s talks between Taiwan and China would pave the way for cross-strait banking ties, the main bourse’s finance and insurance sub-index rallied 15.44 percent last week, compared with a decline of 2.64 percent on the benchmark TAIEX.
But the euphoria may have been driven by the stocks’ rather low valuations compared with their Asian peers, analysts said, meaning the gains could be short-lived and investors should be cautious.
“We recommend profit-taking on the recent rally of stocks” driven by the cross-strait talks, Daniel Chang (張博淇), head of equity research at Macquarie Securities Ltd’s Taiwan branch, said in a research note released on Friday.
“We believe that the prospective benefits” of buying right now “are either too distant in the future or too minor and current macroeconomic headwinds will be the primary factor influencing earnings and share prices in the medium term,” Chang said.
Financial stocks have suffered a sell-off most of the year on concerns of global liquidity amid the credit crisis. As of Oct. 31, the finance and insurance sub-index had plunged 43.25 percent for the year, compared with a fall of 42.74 percent on the TAIEX, the stock exchange’s tallies showed.
Investors’ tastes for financial stocks last week, however, rode on the back of expectations that Taiwan and China might sign a memorandum of understanding (MOU) on cross-strait banking regulation by the spring, as suggested by Straits Exchange Foundation Vice Chairman Kao Koong-lian (高孔廉) on Tuesday, allowing local lenders to gain access to the Chinese market and serve Taiwanese businesspeople there.
Chinatrust Financial Holding Co’s (中信金控) shares jumped 18.11 percent last week, followed by First Financial Holding Co’s (第一金控) 14.47 percent increase and Mega Financial Holding Co’s (兆豐金控) 9.84 percent rise. Stocks of Taishin Financial Holding Co (台新金控) were up 6.88 percent and Cathay Financial Holding Co (國泰金控) up 6.81 percent.
Brokerage stocks also caught investors’ attention last week on news that the regulator planned to let qualified domestic institutional investors (QDII) in China invest in Taiwan’s financial markets.
SinoPac Securities Corp (永豐金證券) projected NT$37 billion (US$1.1 billion) in inflows into the domestic financial market following proposed amendments to QDII regulations that would lead local brokerages to launch QDII funds.
Shares of Masterlink Securities Corp (元富證券) rose 7.04 percent last week and Yuanta Financial Holding Co (元大金控), which owns the nation’s largest brokerage, Yuanta Securities Corp (元大證券), saw its shares rise 7.42 percent.
Chang said he didn’t expect a cross-strait MOU before the first half of next year and believed it would take years before local banks would see significant benefits.
But perhaps the biggest factor weighing down market sentiment is whether the global credit crisis will begin to subside.
“We expect more downside [pressure] on local stock prices given the weakening macroeconomic environment and rising credit risks,” Chang said.
Citigroup Global Markets sees local banks’ exposure to US subprime-related investments and the deterioration of credit quality in their customers as continuing risks for investors, Citigroup analyst Braford Ti (鄭溫煌) said.
After a trip to the US to meet clients, Ti said in a report on Friday that many US investors recognized the low valuations of Taiwanese banks and the bargain-hunting opportunity this posed.
He suggested buying shares of the “best franchises,” especially large institutions and those with few family-owned stakes.
“Although stocks were sold indiscriminately on the way down, we expect investors to be more discerning on the way up,” Ti wrote, adding that Citigroup favors First Financial Holding Co (第一金控), Chinatrust Financial and Yuanta Financial.
By comparison, Macquarie is pessimistic about shares of Chinatrust Financial, Mega Financial and Taishin Financial.
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