Taiwan's stock market recently plunged: The TAIEX reached 6,912.09 points during trading on April 22, but it later dropped for six consecutive business days from April 26 to May 3. The index later fell below 6,000 points. As the index slid over 1,000 points within such a short period, the wealth of tens of thousands of people was again miserably "redistributed." Popular sectors such as TFT-LCD, DRAM, basic raw materials, integrated financial institutions and real estate seem to have become hot potatoes overnight.
Now, panic investors have three worries: The "appreciation effect" caused by the continuous appreciation of the US dollar, the "Wen effect" (溫氏效應), triggered by Chinese Premier Wen Jiabao's (溫家寶) remarks, and the "independence effect" due to people's concern that a war may break out across the Taiwan Strait if Taiwan declares independence.
Although many famous stock market analysts have urged investors to reduce their investment in shares at the moment, I personally believe that this is another great opportunity for them to buy cheap shares.
Let us take a good look at the international foreign exchange market. The euro has been an early index for currency appreciation and depreciation. Its value has not dipped to new lows since April 20, and it's in fact rising gradually. How many Taiwanese shares and New Taiwan (NT) dollars exactly will foreign investors sell due to the expected appreciation of the US dollar? The development of the euro serves as a reference index.
Moreover, although the "Wen effect" is very powerful, the so-called "macro-economic control policy" was quickly proposed before Wen's visit to Europe and the annual "Golden Week," a week-long Chinese vacation.
Because of its strong impact, the policy has immediately become a global issue and has even alleviated international pressure on the Chinese yuan to appreciate. I therefore believe that it's unlikely that Wen will take other drastic moves in the near future.
As for cross-strait relations, the governments on the each side of the Taiwan Strait have placed their hopes in the US. Although the cross-strait situation is tense, nothing is going to happen. Investors should not be nervous.
In the past, people said that "institutional investors" were the stabilizing force in the market. But this has been completely contradicted by Taiwan's situation in recent years. Foreign investors and asset managers seem just like "retail investors" in the 21st Century. They always buy shares blindly whenever the TAIEX jumps, and sell them whenever the index drops. These young managers or analysts have not even seen one or two stock market cycles, and their method of trading shares according to rumor is exactly like that of retail investors. Since they do not hesitate to buy or sell shares, drastic ups and downs in the market seem to be inevitable.
The investment value of many shares has already become clear after the recent sharp decline. The average "price-earnings ratio" (P/E ratio) of Taiwanese shares is about 12. The share prices are the cheapest in Asia. As for Taiwan's listed companies, their books are considered transparent, and their businesses are mostly international with a high mobility. The risk is therefore limited if you purchase cheap shares with a good track record.
If you want to have more money in your pocket, the most important principle is not to follow the crowd. Investors should zealously embrace "blue chip" shares which attract more stable investment, have a relatively low turnover rate, and are about to be traded ex-rights and ex-dividend as well.
Ku Lai is a columnist for Win-Win Weekly
TRANSLATED BY EDDY CHANG
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