Sun, Jul 04, 2010 page8

• EDITORIAL : Investors ponder unknown knowns

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  Time flies. Some people might not have noticed, but the first half of the year has come and gone, at a time when many in Taiwan were still heatedly discussing the Economic Cooperation Framework Agreement (ECFA) with China, which was finally signed last week.

  With the arrival of the second half of the year there has been a noticeable jump in the temperature, as investors wonder whether to increase their equity investments as the economy recovers or take a break and lower their portfolio holdings over the summer.

  History suggests that investors are likely to reduce stock holdings during the summer, when sentiment is often subdued. According to data from the Taiwan Stock Exchange, the market has stalled in recent weeks with daily market turnover falling below NT$100 billion (US$3.1 billion). This suggests that investors are either having second thoughts about the outlook for the market or have simply lost interest in equities.

  Over the past week, the benchmark TAIEX fell 143.97 points, or 1.93 percent, to 7,330.74. That constitutes a drop of 857.37 points, or 10.47 percent, this year. This fall stands in stark contrast to a spate of positive economic data released recently, as well as the signing of the ECFA with China. It is of course possible that investors remain unconvinced about the ECFA, as it will take time for its full impact on cross-strait trade and investment as well as on industry in Taiwan to become clear.

  Perhaps investor reticence comes from concern about the upcoming legislative review of the controversial ECFA, as opposition lawmakers have vowed to screen the trade pact article by article, while President Ma Ying-jeou (馬英九) simply wants lawmakers to say yea or nay to the deal in its entirety. This could create still greater political uncertainty ahead of the year-end special municipality elections.

  It is also likely that investors are worried about the central bank’s moves to rein in rising housing prices in major cities. Its recent interest rate hikes of 12.5 basis points could lead investors to conclude that the monetary policymaker has begun a determined cycle of credit tightening, regardless of the small size of each individual increase.

  In addition, many listed companies are expected to release their financial figures for the second quarter starting this month. Although the second quarter could be the best quarter for many companies, the latest reports on purchasing manager sentiment and industrial production suggest growth will slow in the months ahead, not to mention the problem of rising labor costs in China.

  Lastly, the still-troubling credit problem in some European economies could well prove to be the single largest uncertainty in the second half of the year. The European sovereign debt problem is far from over and some deficit-hit European countries are taking steps to enhance fiscal discipline, sparking increased concerns that such moves could prematurely curtail or even derail economic recovery.

  While most economists say a double-dip recession looks unlikely in the near term, no one can speak with any certainty as to the sustainability of the economic recovery. The second half of the year looks like being anything but dull for investors, who could well find themselves longing for the relative peace and quiet of what looks like being a hot summer.
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