Taiwan stocks face pre-election volatility, potential post-election rally: analysts

Taiwan's stock market is poised for a period of volatility in the three months leading up to the November elections, a trend historically characterized by sluggish performance, according to investment analysts.

While foreign investors turned net buyers in August, injecting NT$329.5 billion into the market after significant sell-offs in June and July, their capital reserves have not yet been fully replenished. Analysts are closely monitoring whether this buying trend will continue and if domestic investment trusts will increase their stakes. Historically, the three months preceding elections have seen a median negative return, with only three out of nine previous election cycles showing gains during this period.

Conversely, the market has shown a strong tendency to rally in the month following elections, with all nine past cycles experiencing gains. This pattern suggests a potential shift in momentum after the electoral uncertainty subsides. The median return one month after elections has been positive 3.91%, and three months after, it stands at 4.43%.

Despite the typical pre-election jitters, analysts note that the current economic and industrial backdrop differs from past cycles. Key indicators such as seven consecutive months of upward revisions in earnings per share (EPS) and export orders exceeding $90 billion for two consecutive months present a potentially more optimistic scenario. The market's operating range is projected between 42,000 and 49,000 points, with the upper limit dependent on increased trading volume and sufficient capital inflow.

Key indicators to watch include the recovery of securities deposit balances, sustained foreign investment, a rise in trading volume to NT$1.2 trillion, and the trajectory of long-term U.S. Treasury yields. Analysts advise a phased approach to investing, buying on dips near moving averages and increasing positions when the index breaks decisively above resistance levels with significant volume.