Although gloom and doom have characterized the Taiwan stock market in recent months, analysts say the US Federal Reserve's rate cuts last week now make local equities look attractive.
The cuts may help stop the slide in the New Taiwan dollar in the near term and allow Taiwan's central bank more leeway to pursue a looser monetary policy.
The TAIEX ended 3.6 percent higher yesterday on hopes for a better economic outlook. Also boosting sentiment was increased capital inflows from foreign investors, who bought a net NT$3.9 billion in shares on Monday.
Analysts expect the main index to climb to 6,000 before the Lunar New Year in the first liquidity- driven rally since the aftermath of the Asian financial crisis -- when the central bank cut reserve ratio requirements to stimulate the slowing economy.
"We are now raising the level of cash as interest rates are falling," said Dominic Lin (林東明), an economist who manages US$100 million for China Investment Trust Corporation (中華投信).
The negative outlook for the US economy and fears of a possible hard landing in the IT sector have forced fund managers -- both domestic and international -- to sharply reduce their stock holdings.
Sales to the US account for 24 percent of exports and 12 percent of GDP, making corporate earnings highly sensitive to the US economy.
"Taiwanese shares look more attractive now," said Roger Yang, a fund manager with ABN-AMRO Asset Management, who has raised his stock holdings to 85 percent from 72 percent at the end of last year.
Morgan Stanley Dean Witter has also recommended that investors increase their positions in the Taiwan market and advised they wait for a rebound in technology issues.
Morgan Stanley is recommending United Microelectronics Corp (
Indeed, Qualified Foreign Institutional Investors are bringing money into Taiwan at a faster pace. According to local media, these investors now have about US$30.1 billion in Taiwan equities, a record high.
The sharp inflow of money may exert upward pressure on the currency in the near term, though analysts believe the NT dollar will continue to depreciate in the long term along with other Asian currencies.
"The rate cut by the US Federal Reserve has given the central bank more flexibility with regards to the NT dollar," said Denise Yam, an economist at Morgan Stanley Dean Witter in Hong Kong. "But overall, Asian currencies will have to weaken this year in response to the global slowdown."
Analysts, however, expect the liquidity-driven market to continue until the Lunar New Year, when the market may consolidate before making another upward move in March.
Stock markets usually jump on the back of a liquidity-led rally as central banks cut interest rates to stimulate a slowing economy. The rally, which usually begins in a bear market, catches momentum later if the rate cuts succeed in boosting the economy -- and hence corporate earnings.
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