The stock market rose by 4.8 percent last week to close at 7,110.73, outpacing most of its Asian peers after the government intervened and bought local shares, largely blue chip companies, to stimulate investors’ appetite for local shares by utilizing the NT$500 billion (US$16.52 billion) National Stabilization Fund (NSF).
The government’s purchases always give an immediate boost to the benchmark TAIEX, as reflected in its four interventions in the past decade, mostly because of panic sales. This time, the government raised the stock market from its worst performance in two-and-a-half years after stock prices closed at 6,633 on Dec. 19, a level below the index’s 10-year average of 6,700.
Stock prices soared 6.7 percent in the three trading days after the fund was first activated on Wednesday. The rise also fueled new hope that the stock market might rise through the presidential elections, which are scheduled for Jan. 14.
The activation of the fund means a 100 percent guarantee of a short-term lift to the stock prices, but there is no guarantee that the momentum will be sustained in the months after the fund retreats, especially since the world economic outlook appears gloomy.
The fund purchased mostly heavyweight stocks, which are also a safe haven for investors when the stock markets turned bearish. Shares in Taiwan Semiconductor Manufacturing Co and Hon Hai Precision Industrial Co soared 5 percent in the middle of the trading session on Wednesday.
Even so, investors appeared skeptical about how great an impact the government’s move would have on the market because turnover failed to reach the “healthy level” of NT$100 billion. On Friday, turnover totaled NT$94.86 billion, after hitting a three-year low of NT$53.43 billion on Dec. 16.
Equity investors have stayed on the sidelines to reduce investment risk amid political uncertainty in Taiwan and unresolved European debt problems over the past month.
Such concerns are not going away. The wobbling European economy is poised to kill the growth momentum of the nation’s exports — one of the key pillars of Taiwan’s GDP growth — next year, the central bank warned last week, saying that growth could contract to as low as 2 percent next year in the worst-case scenarios, citing a forecast by the Asian Development Bank earlier this month.
In addition, the government fund usually takes a defensive strategy by buying just enough shares to keep the TAIEX slightly above the key 10-year average of 6,700, Value Partners Concord Asset Management Co analyst Henry Chen (陳志恆) said.
That means the upside will be very limited, Chen said. He warned investors to be cautious and buy stocks with high yield rate, or with stable operations.
Financial stocks and electronics shares topped the investors’ favorites last week, according to Taiwan Stock Exchange statistics, with state-run Mega Financial Holdings Co, Chinatrust Financial Holding Co and LCD panel maker AU Optronics Corp the top three.
For investors looking for a longer-term investment, fundamentals should be a key consideration, rather than pinning hopes on short-term governmental forces for returns.