Business polls and a recent string of data seem to indicate that the economy is improving and investors are more optimistic than earlier this year. This optimism might prove unsustainable, however, if domestic consumption and private investment remain weak.
On Thursday, an ING Investor Dashboard survey showed a significant improvement in local investment sentiment, with 43 percent of Taiwanese stock investors polled saying they were optimistic about economic prospects in the second quarter, up from 14 percent in the previous quarterly survey.
Stock investors’ growing optimism in the domestic economy was also reflected in rising confidence in the housing market. A poll released by Evertrust Rehouse Group on Thursday showed 60 percent of respondents expressing an interest in real estate investment in the next six months, up from 54 percent in the previous survey conducted at the end of last year.
The overall bullish sentiment was bolstered by several factors — rising factory utilization rates amid a wave of rush orders, signs of a mild upturn in the local technology sector, increasing capital repatriation on the back of improved cross-strait relations and market-friendly tax policies — and a growing feeling, even if temporary, that the global downturn could be nearing its bottom.
But all these positive signs cannot hide the fact that there are equally hard economic data in the pipeline. Unemployment rates around the world continued to rise last month, and industrial production in the US and the EU remained weak. Both the Asian Development Bank and the World Bank have further slashed their forecasts for regional and global economic forecasts, indicating that major economies continue to suffer from poor fundamentals.
With economists predicting that Taiwan’s economy would continue to falter in the coming quarters, the public should be wary of the recent stock market rally and bear in mind that share prices could remain volatile in the near term. Without solid economic and corporate fundamentals, the recent surge in equities could be attributed to three short-term causes.
First, it was a technical correction after a long slump. Recent market gains stemmed largely from sizable buying of extremely low-priced stocks, and profit-taking is likely to follow. With the TAIEX retreating 4 percent on Friday, investors should be alert to further profit-taking around 6,000 points given that the index has risen 25.4 percent this year.
Second, short covering pushed up share prices. A large number of Taiwan’s listed companies hold their annual general meetings (AGM) in May and June. Major investors who have shorted the stock are required by law to buy back shares they sold earlier to cover their position two months before the AGM to protect shareholder rights. It is therefore not unusual to see the stock market surge during the AGM season.
Third, investors’ increasing appetite for riskier assets such as equities, rather than safe-haven assets such as US bonds, drove the market higher. The ING survey reflected this more aggressive stance among Taiwanese investors, with 31 percent of respondents saying they favored high-risk investments, up from 15 percent in the previous quarter.
It is good to see market sentiment turning more positive after being in the doldrums for so long. However, if the government’s economic stimulus package and easy monetary policies only succeeded in driving up equity prices rather than boosting domestic investment and private consumption, we should be worried that another financial bubble may be forming.