Despite a pep talk from the nation's top brass and an estimated NT$20 billion in government-related equities buying, the TAIEX just couldn't shake off that sinking feeling last week.
The worry: Key US interest rates are on the up and up -- possibly 75 to 100 basis points higher from today's 6.50 percent. That, in turn, could slow US demand for Taiwan's manufactured goods.
After rising 3 percent in the May 15 to May 20 period, the nation's main index fell 2.9 percent last week, dropping 260.89 to 8,559.46. The TAISDAQ index fell 4.7 percent, or 12.51, to 251.25.
Since President Chen Shui-bian (陳水扁) took office, the TAIEX has plunged 6.1 percent -- prompting administration officials on Friday to hold a press conference at which they reminded everyone that the nation's economy remains basically sound. Meanwhile, foreign institutional investors unloaded a net NT$6.2 billion last week.
Still, equities analysts are concerned that higher interest rates and trouble on the NASDAQ could mean less demand from the US, hurting Taiwanese exporters.
"Share prices and valuations are correcting, based on the perception that demand may be less in the future," said Neal Stovicek, head of equity research at National Securities Corp (
But Stovicek added that the "downside risk in the market is less than it was four weeks ago," and interest rates will eventually "top out." Once US rates hit their peak -- possibly at 7.50 percent -- demand is expected to pick up again as the US Fed gradually reduces interest rates. As for analysts' earlier projections from that the TAIEX would hit 12,000 or 13,000 before year-end, Stovicek said that focus on how the main index performs is misplaced.
Instead, he said, investors ought to pay attention to the sectors where demand is expected to remain strong -- such as ICs and passive components.
"We're not buying the market. We're looking at sectors and products," Stovicek said. "The whole point is quality, quality, quality. So focus on credible demand plays."
In addition, Stovicek also favors "quality bank plays" such as Chinatrust (
Analysts and local institutions expect the main index to trade between 8,320 and 9,230 in the near-term as low turnover in the market persists. The four government-linked funds purchased an estimated NT$20 billion in equities last week, according to media reports. Much of the buying was centered on IC shares and traditional industries such as Taiwan Cement (台灣水泥), Formosa Plastics (台塑) and Nan Ya Plastics (南亞塑膠).
Other buying targets included financial shares, which have been dragged down lately by worries over high overdue loan ratios at some banks. Some of the beneficiaries included International Commercial Bank of China (ICBC,
ICBC climbed 8.6 percent to NT$31.5, while UWCCB rose 2.4 percent to NT$34.2.
Market research firm Dataquest has forecast that demand for DRAM chips will exceed supply starting mid-year and won't let up until late 2002. As a result, according to the research firm, contract prices could reach US$7 to US$7.50 by the third quarter, up from a range of US$6.50 to US$7 today.
According to the American IC Exchange, the benchmark 64 megabit DRAM traded between US$6.30 and US$6.68 on the spot market on Friday.
Analysts say Taiwanese DRAM companies may be a good place to park some money, as the sector is likely to weather these times of market turbulence.
"DRAM shares might be the best picks," said Andrew Teng, equities researcher at Taiwan International Securities. "If the market goes down, these shares will get good support. The spot DRAM price is on the up trend."
Teng said DRAM prices could move as high as US$9 to US$10 in the second half of this year. For the year, he expects DRAM prices to average out at US$7.50.
Besides healthy spot prices, another indicator of good times ahead for DRAM makers is the move toward contract pricing.
Since 1995, customers have primarily purchased DRAM on the spot market. But now that supply is dwindling, contracts may make a comeback, as they provide customers a guaranteed stock of DRAM.
"That's why you sign a long-term agreement with the supplier, to ensure your supply," Teng said. "That's an indicator of a tight market."
Some of the demand for DRAM will be driven by the Windows 2000 operating system, which uses 128 megabits of memory. As businesses implement the system, Teng said, "that will stimulate some demand."
Much of the supply crunch stems from insufficient manufacturing capacity. "Many DRAM makers under-invested in their capacity over the last two years," Teng said.
Adding to the capacity crunch is the demand for flash memory -- the chips that remember a cell phone user's telephone directory after a mobile phone's power has been switched off.
Because the sky-high margins for flash are luring manufacturers into that market, Teng said, there's less available capacity for DRAM. In the short-term, a shortage of Intel CPUs may keep local DRAM shares from advancing, Teng said. "We don't know when this shortage will be relieved," he said, though Intel says the drought will be over by next month.
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