The possible delay in the legislative ratification of the cross-strait service trade agreement would bring “a difficult moment” for the nation’s financial sector, while stock market volatility would only persist in the short term, analysts said yesterday.
The TAIEX closed up 83.92 points, or 0.98 percent, at 8,689.30 yesterday as shares continued a technical rebound, with market turnover expanding to NT$82.18 billion (US$2.68 billion) from NT$79.02 billion the previous day.
“The risk that we are most concerned about for now is the growth outlook and asset quality of SME [small and medium enterprise] loans amid a possible delay in the passing of the latest trade agreement in the Legislative Yuan,” Barclays Capital Securities analyst Noel Chan (陳聖賢) said in a client note.
Chan’s rationale is that Taiwan’s SMEs would be the ultimate beneficiaries of closer cross-strait trade links, while more robust business activity should prompt more loan growth and demand for wealth management services, which would in turn benefit the financial sector.
“Given their greater investment and trading activities with their China counterparts, we believe Taiwan’s SMEs urgently need an official and regulated system and framework agreement by both governments to protect their rights and intellectual property in China,” Chan said.
“Otherwise, the operational risks of those Taiwan SMEs with business units in China will likely increase. This indirectly would affect the asset quality and loan growth outlook for Taiwan banks,” he said.
The financial sector also faces a challenge from the continued depreciation of the yuan, he added.
Analysts said the ongoing student occupation of the Legislative Yuan in Taipei in protest against the service trade pact could lead to the stalling of the ratification process that was originally expected to be passed before the legislature goes into summer recess in June.
While uncertainty caused by the student demonstrations has led to short-term volatility on the local stock market, UBS Securities views market volatility as a short-term phenomenon if the demonstrations continue.
“While we view the service trade agreement as a long-term positive for Taiwan, we do not expect a short-term change or impact on economic fundamentals,” UBS Securities Taipei branch’s equities and research head William Dong (董成康) said yesterday.
In terms of fundamentals, Dong said the pace of the global recovery remains the most important driving force for the market.
“While short-term volatility may persist, we expect Taiwan to be a beneficiary of a gradual global recovery,” he said in a research note.
UBS maintained its target for the TAIEX this year at 9,050.