Rather than trying to make a quick profit from the much-anticipated rally in stocks ahead of the Jan. 14 presidential and legislative elections, stock investors should probably look for other investments to earn their year-end bonuses this year.
In the month immediately preceding the past four direct presidential elections, the TAIEX rose more than 2 percent on three occasions, as the party in power used state funds to prop up the market. In February 2008, local stock prices rose 5.13 percent prior to the presidential poll on March 22.
However, history is not always the best guide to the future and there are growing concerns that the opposite could happen next month.
A number of signs make a TAIEX rally increasingly unlikely. As the European sovereign-debt crisis spreads to the core of the eurozone, even France has come under mounting pressure to safeguard its triple-A sovereign rating, after the yield on its 10-year government bonds rose 6 basis points to 3.51 percent.
At home, economic growth is losing steam amid stagnant global demand for Taiwanese electronic products, which prompted the Directorate-General of Budget, Accounting and Statistics to slash its forecast for annual GDP growth last week, for the fourth time this year, to 4.51 percent for this year and 4.19 percent next year.
To staunch stock price losses, the Financial Supervisory Commission announced on Monday last week that it would tighten the use of borrowed stocks for the purpose of short selling. Such activity is now capped at 20 percent of the previous 30-day trading average, as opposed to the old limit that permitted short-selling of up to 3 percent of a company’s outstanding shares.
However, the commission’s move did not stop investors, especially overseas fund managers, selling Taiwanese stocks. Foreign investors hold more than 32 percent of local stocks by market value and they have tended to use borrowed stocks to short-sell.
On Wednesday, one day after the new short-selling rule took effect, the TAIEX plunged to a two-year low of 6,806 points. Overseas fund managers sold NT$10.57 billion (US$347.5 million) in local stocks on that day. Last week, the TAIEX ended down 6.12 percent, well behind its Asian peers. Japan’s Nikkei fell 2.6 percent over the same period, while Hong Kong’s Han Seng Index tumbled 4.3 percent.
Market analysts including Value Partners Concord Asset Management Co’s Henry Chen (陳志恆) do not believe share prices are about to stage a pre-election rally. Indeed, Chen has said that the index could fall to its 10-year average of 6,730 points.
Investment bank Credit Suisse has also said the presidential election is “near-term risk, not a catalyst,” citing the closeness of the race as shown by the latest public polls.
The bank urged investors to “stay cautious” for the duration of the election campaign, especially for non-tech stocks like airlines, tourism-related shares and companies with large assets, because a defeat for the Chinese Nationalist Party (KMT) could lead to a fundamental change in trade with China.
In addition to sluggish market sentiment, the latest central bank data also signaled a reduction in the availability of short-term capital for investors to buy stocks, because the annual growth in M1B money supply, a narrow measure of money in circulation, grew at 5.14 percent annually last month, down from annual growth of 6.28 percent in September.
As the economy loses momentum, the TAIEX is likely to experience a rare decline during election season as it did in the run-up to the 2000 presidential election. At that time, shares plummeted 13.2 percent in February, the month before the vote on March 18.
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