Markets to face the heat in the short term

Market watchers are not optimistic about the short-term prospects of Taiwan stocks following the election of the DPP's Chen Shui-bian (陳水扁) to the nation's highest office yesterday.

Taiwan's neighbor may have trouble digesting Chen's victory, they say, and China's reaction could spook local investors.

But on the other hand, any share sell-off over the next few days could be an opportunity to buy stocks cheaply, as the market's fundamentals are strong.

"The TAIEX will test the 7,500 point support level" this week, said Dicy C. Dai (戴震), a senior market commentator and former chairman of Polaris Securities Investment Trust.

"The worst-case scenario has come true for stock investors. With the drastic differences between China and the DPP on the unification issue ... the Taiwan stock market will face difficulties in the next few months, if not years."

The nation's main index closed at 8,763.27 points Friday, down 7.6 percent for the week.

Last Monday, the TAIEX plunged more than 600 points, or 6.6 percent, after investors began to realize that Chen would defeat KMT candidate and current vice president Lien Chan (連戰).

To help support the market, the government purchased an estimated NT$80 billion in stocks last week through four government-linked funds and the national stock stabilization fund.

Minister of Finance Paul Chiu (邱正雄) said last night that the government would be ready in the event investors dump shares when the market opens tomorrow.

Weeks before the election, Gau Ching-Yuan (高清愿), chairman of President Group, predicted that a Chen victory would result in the TAIEX losing one-third its value, which was then roughly 10,000.

"The national stabilization fund has to support the market as much as it can, or else there will be hardly any buyers over the next few days," Dai said.

"If there is anyone to blame for the result of this election, President Lee Teng-hui (李登輝), should be held responsible. If he did not insist on expelling James Soong (宋楚瑜) from the power center of the KMT, an alliance between Lien and Soong would have certainly prevented the stock market from facing such a difficult time as it does now.

And even with the support of the national stabilization fund, most traditional sectors will not be able to attract investors -- except electronics and exporting stocks -- for quite some time."

But not everyone is pessimistic, as the market may drop for just a few days before bouncing back, provided that China isn't too upset by Chen's victory.

"Taiwan's stock market will inevitably fall in the next two to three days before it rebounds," said Larry Liao (廖瑞雄), a fund manager at ING-CHB Securities Investment Trust.

"The biggest worry undoubtly is China's reaction," Liao said. "I expect China will be announcing its reaction very soon. If China's reaction is far beyond our imagination, the magnitude of the drop will be impossible to predict."

But on the otherhand, if China restrains itself and heeds warnings from the US to keep peace across the Taiwan Strait, Liao said, "I do not think the market will turn into a bearish market. On the contrary ... after the market falls over the next few days, it'll be time to buy."

Liao said the market's fundamentals were strong and noted that stocks have just recently entered a bullish phase.

"According to our research, the average bullish period for the Taiwan stock market in the last three decades has been 45.5 months. And this time [the bullish period] started in February 1999," Liao said. "It should continue sometime into 2002."