The TAIEX on Thursday plunged 6.31 percent to close below 10,000 points — its largest one-day drop of all time — after a wave of selling gripped global markets. Fortunately, the benchmark index staged a rebound the next day and recovered 2.44 percent to close at 10,045.81 points, above that psychologically important mark.
While across-the-board sell-offs in Asian equities ended on Friday, market uncertainties remain and Taiwan — from the government to companies and investors — must prepare for the greater frequency of threats such as market volatility, trade disputes, geopolitical tensions and the possibility of another recession in the global economy.
Despite Taiwan having sound economic fundamentals and ample foreign-exchange reserves with no foreign debt, global risks cannot be held at bay. They will rematerialize and extend their destructive effects through various asset classes and to the major economies of Asia, including Taiwan.
The world is experiencing a trend away from multilateralism and toward unilateralism, with governments struggling to reach a consensus on how to calm markets and restore growth. Being reliant on exports, Taiwan faces many risks that are external, but which are beyond its control — everyone must look out for potential threats.
More worrisome is that investors have the bad habit of expecting the government to prop up local equities every time they drop. While everyone knows that the local bourse should reflect fundamental factors, it has become an unwritten rule that the government must intervene and arrest any sharp fall.
Calls last week for the government to activate the National Stabilization Fund when stock prices showed a substantial correction — despite few signs of market disorder — highlighted this mindset among some people. The NT$500 billion (US$16.18 billion) fund is meant to keep the nation’s economy and capital markets steady in times of crisis and when non-economic factors are weighing on the market.
The fund is an emergency mechanism. It should enter the market swiftly, buy up stocks more vigorously than other government efforts and exit as soon as the market stabilizes. Moreover, it should be a last-ditch attempt to boost the market when efforts by other government funds to regain investor confidence — the Labor Insurance Fund, the Labor Pension Fund, the Civil Servant Pension Fund and the Postal Savings Fund — have all been in vain.
However, the state-run fund is a double-edged sword that could help or hurt the local market. It can restore investor confidence, but it can also send the message that returns on local equity investments are guaranteed, because the fund can be relied on to buy when the market is low.
Perhaps with this in mind, the fund management committee on Thursday evening decided it was not the right time to enter the market, an indication that the government remains confident in company fundamentals and considers this plunge in the market not to have been as bad as the previous six times that the fund was activated.
If the government has a sincere desire to prop up the stock market, it should avoid intervening directly, because intervention can only delay a fall and prevent the market from hitting bottom.
Avoiding intervention is definitely the way to help the market return to normal, as global and local economic fundamentals remain stable and growth momentum is sure to resume, despite some short-term volatility in the markets. Instead, the government should do more to eliminate investor uncertainty over domestic investment and implement economic policies that are more consistent.
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