Taiwan Stocks to Challenge 46,000 Again This Week? Analysts See Potential for Year-End Rally

Taiwan's stock market (Taiex) showed considerable strength last week, surging 1,585 points, a gain of 3.58%. While the index briefly touched the 46,000 mark, it ultimately settled at 45,811 points by the week's close. Despite a downturn in major U.S. stock indices and declines in Taiwanese ADRs like TSMC, UMC, and ASE Technology Holding on Friday, along with a slight dip in the Taiex futures overnight, some analysts remain optimistic about the market's prospects.

Hu Rui-han, Chairman of Yuanta Securities Investment Trust, pointed to significant foreign investment as a key indicator. The Norway Government Pension Fund Global, the world's largest sovereign wealth fund, increased its holdings in June. Additionally, MSCI's decision to raise Taiwan's stock weighting, effective in September, is expected to further boost foreign inflows. Hu anticipates another substantial rally in the Taiwanese stock market before the end of the year.

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The world's largest sovereign fund 'Norway Sovereign Fund' entered the market in June, coupled with MSCI's three-stage increase in Taiwan's stock weighting, which will officially take effect in September. Before the end of the year, the Taiwanese stock market should have another major rally.

Hu outlined two potential scenarios for this year-end rally. The first scenario involves continued buying by foreign investors, leading to sustained increases in the spot market and potential short-covering in futures, thereby fueling a strong upward trend with increased volume. The second scenario suggests a possibility of a more significant pullback, potentially forming a "second bottom" around the 42,000 to 43,000 point range before resuming its upward trajectory.

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The probability of a further significant correction in the index in the short term is limited. A probability of range-bound consolidation at a high level is more likely. Subsequently, trading volume should be continuously observed.

Du Hsin-pei, fund manager at Yuanta Small-Cap Fund, noted that August has historically been a strong month for the Taiex, with an average gain of 2.93% over the past decade, occurring 70% of the time. Given the market's correction and reduced trading volume in July, Du believes the probability of a sharp short-term decline is limited. Instead, a period of consolidation within a high range is more likely, with trading volume being a key factor to monitor. The performance of OTC and small-cap stocks has been weaker, failing to reclaim their quarterly moving averages.

Du recommends investors focus on sectors with strong long-term AI trends, such as copper foil substrate (CCL), IC substrate, and ABF substrate manufacturers, which have recently shown resilience by moving above their quarterly moving averages. High-end MLCC and passive component stocks, while driven by capital flows, are also noted. However, the core investment strategy should remain centered on leading AI-related stocks, with opportunities for short-term trading in thematic or lagging stocks.

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Investors' core holdings should still be focused on leading AI-related stocks.