The stock market will reopen today following an 11-day Lunar New Year holiday. The local bourse is expected to stay positive on the first trading day of the Year of the Pig, following a wave of upbeat soundings of global stock markets during the holiday.
First it was the blue-chip Dow Jones Industrial Average, which reached a record close of 12,786.64 on Tuesday, followed by the tech-laden NASDAQ Composite Index that hit a six-year high to 2,524.94 last Thursday. The sentiment then spread to Japan with the Nikkei-225 index finishing at a fresh near-seven-year high of 18,188.42 on Friday, while other markets in Australia, South Korea and Singapore all struck record highs to end the week.
The benchmark TAIEX closed the Year of the Dog at 7,809.45 for a year-on-year increase of 1,277.27 points, or 19.55 percent -- the largest rise in the past three years, with property shares leading the rally for an increase of 102.1 percent overall.
Geomancers have predicted that property shares will remain a good investment this year because the pig, according to the zodiac chart, ushers in earth and wood elements, which they believe bode well for the construction and real estate sectors. Be it science or superstition, however, a good investor should begin with hard facts on investment trends and business development.
In the property sector's favor, fund managers already point to a sustained boom this year on the back of strong domestic demand, improved market sentiment and the anticipation of Chinese visitor arrivals. But this sector has been soaking in a bull market for almost three years, so it needs a near-term correction to refresh.
Just as properties in Taiwan are underpriced relative to those in other Asian countries, the TAIEX index is also expected to continue experiencing a laggard rise this year due to this "undervaluation." Nonetheless, it is not the first time that high hopes for the surge of a stagnant TAIEX have been pinned upon the conventional wisdom of undervaluation. The question is how solid this surge will be and how long it will last.
Markets are complex, change fast and hard to predict. But there are some firming trends for the year ahead. A look at the differential between stock dividend yields and bond yields, for instance, shows that the yield for Taiwanese stocks is about 1.5 percent higher than local bond yields, which UBS AG says creates good incentives for investors to switch out of bonds into equities.
A comparison with other emerging markets indicates that capital inflow will likely continue this year. The 652 stocks that make up the TAIEX offer a dividend yield of about 3.36 percent, compared with the 2.11 percent yield on the Morgan Stanley Capital International (MSCI) Emerging Markets Index in the past 12 months, but Taiwan's benchmark has only returned 17 percent last year, while the MSCI gauge saw a 20 percent advance.
Another positive sign is that local companies are expected to see robust earnings growth this year. Both BNP Paribas Securities and Credit Suisse Group predict Taiwanese firms will deliver above-regional-average earnings per share (EPS) growth of approximately 20 percent this year.
Investors may now feel comfortable and be looking forward to a boom year, but first they will need to be cautious about the risk of a tactical correction in the near term and get the uncertainty of election-year politics out of the way. Above all, investors should avoid moving in and out of the market based on short-term political events.
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