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EDITORIAL: Investors learn three lessons

Citigroup's disclosure of record quarterly losses last week sent regional stock markets into a plunge that taught investors at least three important lessons.

Lesson One: The 4.98 percent stock rally on the local bourse in the first two trading sessions following the Chinese Nationalist Party's (KMT) victory in the legislative elections was not only short-lived but was also just a reflection of market expectations.

The rally was based on expectations of an improvement in cross-strait relations and the potential economic benefits that may bring. However, as soon as investors turned their attention away from election rhetoric and back to reality, they were still faced with the same old problems. The KMT-controlled legislature still has work to do to develop a sound investment environment at home.

The election results suggest the KMT has the power to initiate any policy it wants and can even force the government's executive bodies to implement its policies. However, without clear and executable policy directions, there is a limit to how far Taiwan's economy can expand. Furthermore, no matter which party wins the presidency in March, the notion that the economy can expand further by opening up to China is only an untested hypothesis.

Moreover, any cross-strait policy changes will require Beijing's cooperation and that may take time to achieve, especially on issues that touch on the nation's sovereignty such as cross-strait banking and direct flights. Without real progress, relaxed policies will still be nothing but political rhetoric and the rally in the local stock market will always be based only on talk, not substance.

Lesson Two: Election hype aside, the local stock markets, like other markets, are dominated by the ongoing concern that the US is entering a recession.

Last week, disappointing employment and business confidence figures, along with weak corporate earnings from Citigroup, Merrill Lynch and Intel, indicated the world's largest economy may be headed for a severe downturn following months of financial turmoil rooted in the subprime mortgage morass.

While the US Federal Reserve seems ready to make bold moves on interest rates and the White House is also in the process of offering an economic stimulus package of up to US$150 billion, it is not certain that these measures can substantially revive the US economy and they may serve only as a psychological boost to market sentiment.

Lesson Three: The fall of regional stock markets last week also appeared to suggest that the prevailing theory that Asian economies can decouple from a potential US economic slowdown -- because of strong demand elsewhere in the world, particularly China and India -- is untrue.

With Asia's growing inter-region trade and huge foreign exchange reserves it is possible that growing Asian economies can minimize the impact of a US slowdown. But a downturn in the US economy would still have global implications. Slower demand for goods from emerging markets because of weak US consumer purchases and continued capital outflows from emerging markets to tend to domestic needs are just a few symptoms of this.

Of course, there are no guarantees the stock market will continue to fall amid concerns of a slowdown in the US. But no one likes recession threats or concerns about inflation -- fears that weigh on corporate earnings and dent investor sentiment.

Later this month, several major technology firms in Taiwan will disclose their fourth-quarter earnings and their business guidance for the year. Their performance will shed some light on whether the heightened fears of a US slowdown will spill over to other major industrial countries and affect Taiwan's export-dependent economy. Until then, the local market will continue to fluctuate and will only stabilize when all threats subside.
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