Long-term rally in stocks anticipated despite decline

Taiwan stocks tumbled Friday on declines on Wall Street a day earlier. The local TAIEX fell 133 points, or 1.8 percent, to 7,412.

Despite the sell-off, the TAIEX managed to hold on to the 7,400 mark and its monthly moving average. For the week the index rose 66 points.

On Thursday, U.S. stocks took a nosedive on slipping manufacturing activities in September and an increase in first-time claims for unemployment insurance. The Dow, Standard & Poor's 500 and Nasdaq fell 2.1 percent, 2.6 percent and 3.1 percent, respectively.

Analysts said in Taiwan, a short-term correction is likely, given the situation in the United States.

They pointed out from now to mid-October, no U.S. economic data will be released to give markets a boost. Investors are faced with pressures to sell during this time.

In the long-term, however, analysts are more optimistic about local stocks, given several factors.

First, Taiwan and China are expected to sign a financial memorandum of understanding in October at the earliest and an economic cooperation framework agreement sometime next year. The documents are likely to start off a new rally in the market.

Secondly, institutional investors were still on the buy side for the most part of September. Foreign investors bought a net of NT$142.2 billion in the month, indicating they were still optimistic about Taiwan stocks.

At the same time, foreign capital has continued to pour into Asian markets, providing further incentives for a rally in local markets.

Separately, analysts pointed out Typhoon Parma's impact on Taiwan stocks will be limited.

Hsu Chia-hao, analyst with Capital Investment Group, said historically, typhoons only created a short-term impact. “In the end, Taiwan stocks will return to the fundamentals,” he said.

Analysts cited data tracking back to 1996 that each time a storm passed through Taiwan, the TAIEX rose a week after.

For example, Typhoon Morakot, which did significant damage to southern Taiwan in August, left investors with a desire to buy reconstruction-related stocks. The TAIEX rose 0.2 percent the day stock markets opened after the storm and surged by 2.92 percent for the week.

By noon yesterday, Parma was centered at 320 kilometers southwest of Taiwan's Pingtung County and was at a virtual standstill. It was not known by the time of this report whether stock markets in Taipei will be closed today.

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