Continuous declines in Taiwan's share prices recently can be attributed to a number of economic reasons, but analysts point to other culprits: political uncertainty across the Taiwan Strait and the poor performance by the new administration, which have rattled investor confidence.
Unless the political situation improves, the TAIEX may put in a lackluster performance for the foreseeable future. What the market needs, analysts say, is a breakthrough such as the implementation of the three-links with China.
"The obscure stance of Chen Shui-bian (
"Also, the poor performance of the new administration in its economic policies has further aggravated the situation."
Dai said that although Chen has tried not to anger China after his inauguration, China's patience is limited. "If the situation does not improve, sooner or later China will launch some unpredictable moves against Taiwan and the new administration. Until the political tension across the strait is eliminated, few investors will devote their money to the stock market, since the biggest victim of a raging China would undoubtedly be the local stock market."
Dai also pointed to some of Chen's economic policies, which he described as "chaotic."
"For example, the cut in weekly working hours is ridiculous under the present economic situation, but the Legislative Yuan passed it in a speedy fashion. It will only make the traditional industries go down further as labor costs continue to grow."
Meanwhile, the new administration has been trying to impose higher taxes on the private sector in order to keep its campaign promises.
In addition to a proposal to impose a capital gains tax on unlisted shares -- a plan that hasn't won support from Minister of Finance Shea Jia-dong (
As a result, more and more high technology companies may move to China or other places in order to maintain their attractiveness to their investors, analysts say.
"If high technology companies decide to move to China, like 50,000 other Taiwanese companies in traditional industries, there will be not much left in Taiwan," Dai said.
"It seems to me that the new administration has been trying to hurt both the traditional and high technology industries. The worst part is that they are even not aware of it," he said.
"Maybe the new administration needs time to adjust themselves in its coordination ability, but the damage to the economy has already been done. And the stock market has partly reflected that."
When it comes to economic fundamentals, a number of factors have chased capital away from the local stock market, said a local fund manager, who declined to be identified because he fears harassment by SFC regulators.
"The crowding-out effect in the financial market has been significant enough to depress any recovery," the fund manager said.
"So many things have been absorbing money from the market, including the privatization of state-owned companies, the high-speed rail project and recently the fixed-line companies (
The fund manager also said external factors are having an effect on Taiwan shares, notably rising interest rates in the US.
"It may not disturb the local money market seriously, but the interest rate gap between Taiwan and the US would certainly cause some outflow of local capital. Some foreign fund managers are currently evaluating the importance of the Taiwan market relative to other Asian markets and other emerging markets.
"If they find other markets are more attractive than Taiwan, an outflow of foreign money could cause more damage to the local market."
But the fundamentals of the local stock market are not as bad as one may think, the fund manager said.
"Taiwan's import-export figures are sound. The average price-earnings ratio -- compared with other markets -- is relatively low in the 20s for most traditional industry companies. Even the high technology companies have relatively lower P/Es than markets such as the US and Japan," he said. "If we can see some improvement in third quarter earnings, there is a chance that share prices will come back in the latter half. But a move beyond 10,000 will prove difficult in the third quarter."
Both Dai and the fund manager think a political breakthrough across the Strait will give local share prices a big break.
"If the Goo-Wang meeting could be restarted later this year as a result of pressure from the WTO issue, Taiwan's stock market would certainly get a boost," Dai said. "The three-links across the strait would greatly reduce the trade cost of many Taiwanese companies, both in Taiwan and China, and share prices would reflect that without hesitation."
"If the three-links could be realized in the later half, the TAIEX could shoot up to 15,000 points," the anonymous fund manager said.
"The biggest threat to Taiwan has come from China for over five decades. If the three-links could be realized, it certainly means a lot more than just economics.
"It's too much to ask for the Strait relationship to be the same as on the Korea Peninsula recently, but the three-links would certainly be a big help. And this is really an impetus that the Taiwan's stock market needs."
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