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EDITORIAL: Investors need to stay grounded

With the TAIEX losing 4.34 percent last week to close at 8,161.39 points, following a 1.41 percent rise the previous week and an 11.86 percent increase last month, uncertainties are once again keeping investors at bay.

But Taiwan is not alone. Regional stock markets took another roller coaster ride last week. In Japan, the Nikkei declined 4.23 percent, while South Korea saw its KOSPI Index fall 3.8 percent, Hong Kong's Hang Seng Index dropped 1.18 percent and Singapore's Straits Times Index was down 0.95 percent.

Asian markets remained vulnerable to a spate of negative news ranging from fears of a US recession to ever-rising oil and commodity prices. On top of that, the bailout of US investment bank Bear Stearns by the US Federal Reserve and JPMorgan Chase on Friday was a stark reminder that the turmoil in global financial markets is far from over.

But in Taiwan, investors were particularly watchful last week and should be so this week as well. Ahead of Saturday's presidential election, share prices are likely to remain under pressure and the market could move in a narrow range as a result of political uncertainty.

Market sentiment was dampened by the resignation of minister of finance Ho Chih-chin (何志欽) and Legislator Alex Fai (費鴻泰), who withdrew from the Chinese Nationalist Party (KMT) and resigned as KMT caucus whip over his involvement in the melee at Democratic Progressive Party (DPP) presidential candidate Frank Hsieh's (謝長廷) campaign headquarters on Wednesday.

Without a doubt, that episode reminded investors that anything can happen in Taiwanese politics. Some are worried that more confrontations could occur before election day. This could help explain why foreign institutional investors sold a net NT$44.82 billion (US$1.46 billion) of Taiwanese shares last week in stark contrast to a net purchase of NT$12.76 billion the previous week.

Some equity analysts have tried to convince investors that the recent market correction is healthy for medium to long-term development and there is no need to panic. These analysts also forecast the stock market will take off soon after the election -- if there are no surprises -- given the expectations of better cross-strait relations and the continuation of foreign capital inflows.

These analysts have done what they need to do to sell their ideas. But investors need to do their own homework to avoid mistakes amid a volatile market.

First, investors have to realize that political developments have the ability to influence the market. Regardless of who wins the election, it will certainly take time for the new government to make real changes in cross-strait policies. The pace of policy implementation on this front won't come fast. Placing a bet on expectations is one thing, but a realistic bet on market fundamentals is another.

Second, any improvement in a stock market has a lot to do with the performances of the listed companies and the economic fundamentals of the country. Issues such as foreign exchange losses, employee bonus expenses, weak consumer demand in the US, higher inflation and possible changes in monetary policy should be considered more relevant to the performance of Taiwanese shares than other considerations. Surging oil and commodity prices should also raise investors' concerns about rising production costs and margin pressures for Taiwanese manufacturers.

Therefore, investors should not be falling over themselves with expectations based on China's potential alone. There are domestic and international factors that are more relevant, as the past week has shown.
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