The surge in market liquidity and strong foreign institutional fund inflows enabled the local stock market to surpass 9,900 points last week. At one point on Friday, the TAIEX was just 39 points below the 10,000-point mark, reaching the highest level in 15 years, before pulling back to close at 9,913.28 points.
So far this year, stock markets in at least eight countries have moved up to the highest level in their history. In Asia, shares in China, Japan, South Korea and Hong Kong have been taking turns to hit new highs lately and it appears that Taiwan is next to join the bull-run party.
A bullish market in Taiwanese stocks can generate a wealth effect and encourage consumer spending, which is good for the economy as a whole. Older investors can still recall the local stock market in the 1990s, when domestic consumption was robust, optimism was high and the nation’s economy was vibrant.
However, it will only last while the bull-run lasts. Last week’s stock rally simply reflected an aggressive buying spree by overseas investors. Statistics compiled by the Taiwan Stock Exchange show that foreign institutions bought a net total of NT$78.34 billion (US$2.52 billion) worth of local shares last week, far higher than the NT$2.39 billion net buying by investors from domestic institutions, which pundits have attributed to foreign investors’ renewed interest in Taiwanese equities while facing a regulatory cap in local corporate bonds.
Also, last week’s rally reflected market speculation over the potential for a Taipei-Shanghai stock exchange link, although such a link still has several hurdles to overcome, especially political considerations.
Clearly, foreign institutions have been piling into Taiwan lately. The notion that local investors may have their fair share of the booming stock market has aroused increasing skepticism from the public, since overseas investors have become the major players in this market. However, when the money stops flowing in because of changes in macroeconomic situations or adjustments in monetary policies, the momentum might soon lose steam and a plunge in the stock market would take a toll on all investors.
The government is pushing ahead to make the local stock market more international. Its move to begin a stock exchange link with Singapore in July and other plans to seek stock exchange cooperation with Japan, the UK and Germany are all moving in a positive direction.
However, an important issue facing Taiwan’s stock market is the dwindling participation of local investors. While trying to attract foreign investors, a capable government should also seriously consider why retail investors are reluctant to participate in the local market.
After all, Taiwan’s stock market should be better than what it is today, because the valuations of local shares are relatively cheap compared with their regional peers and Taiwan’s rally lags far behind those of neighboring countries this year. Investors might be welcoming a boom cycle, but the question is, how long can this cycle last?
Even so, most people do not feel they have shared in this growing prosperity, nor do they think their lives are better than before, because wages have remained unchanged for decades and the widening disparity between the rich and the rest of this country is still an issue stirring growing concern. In this sense, the rally in local equities is not “real,” in that the stock market does not truly reflect people’s lives.
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