The TAIEX rose 1.59 percent yesterday boosted by gains on Wall Street overnight and a positive reaction to the legislature on Tuesday approving an amendment to the capital gains tax on securities investments. However, equity strategists said the market needs more good news to sustain the upward momentum.
Fubon Securities Investment Services Co (富邦投顧) analyst Kevin Chang (張宜立) said the timing of the revision to the tax could not be better and the move would lure retail investors back to the market to stem recent equity sell-offs due to external uncertainties and lackluster sentiment at home.
“The passage of the capital gains tax amendment is positive for local sentiment and market liquidity,” Chang said in a note yesterday.
Retail investors account for 70 percent of the total market turnover in Taiwan. However, many Taiwanese high-net-worth retail investors withdrew from the market after the Ministry of Finance initiated talks about revisions to the capital gains tax early last year, he said.
Under the amendment to the Income Tax Act (所得稅法), the 8,500 point index threshold that automatically triggers the imposition of the capital gains tax on individual investors has been removed.
Instead, individual investors who sell more than NT$1 billion (US$33.3 million) in shares each year will be subject to either a 15 percent tax on their capital gains, or a 0.1 percent tax rate on any stock trades that exceed NT$1 billion, effective 2015.
“High-net-worth retail investors are now more likely to return [to the market] after the removal of the capital gains tax overhang and the TAIEX’s recent corrections,” Chang said.
The TAIEX gained 121.57 points to close at 7,784.80 yesterday, with a total of 2.49 billion shares changing hands on turnover of NT$90.43 billion, down 2.64 percent from NT$92.88 billion the previous day, Taiwan Stock Exchange data showed.
Foreign investors and Chinese qualified domestic institutional investors were the biggest net sellers of stock with NT$2.19 billion, followed by domestic proprietary traders’ net selling NT$1.08 billion and domestic investment trust firms off-loading NT$167 million in shares, stock exchange data showed.
Strategists said a daily turnover of less than NT$100 billion and continued selling by major institutional investors indicated that the tax revision factor alone would be insufficient to lift the TAIEX further.
While the recently signed cross-strait service trade pact could be viewed as a long-term positive factor and the revision to the capital gains tax a short-term boost, the current market focus is on liquidity, William Dong (董成康), equities and research head of UBS Securities Taipei branch, said in a separate note.
Dong’s remarks underline a concern in emerging Asian economies about the pressure of capital outflows due to the US Federal Reserve’s plan to gradually scale down its quantitative easing program later this year.
“The question for investors at this point is what to do in a rising yield environment,” he said.
With rising yield and liquidity uncertainty, the local market is likely to continue consolidation in the near term, UBS Securities said, while lowering its TAIEX target to 8,000 points from 8,650, which it set on May 20.
Among local shares, strategists said they favored financial stocks amid expectations of recovering earnings and increased cross-strait collaboration ahead.
Securities brokers should be the most direct beneficiaries of the tax revision because of the lift in retail market turnover and participation, Credit Suisse analysts Chung Hsu (許忠維) and Michelle Chou (周盈秀) said in a note.
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