When the US financial crisis intensified, Taiwan's financial markets faced pressure. The TAIEX, a capitalization weighted stock index, dropped 3.32 percent last week for its fifth straight weekly decline.

To stabilize the stock market, the government took concerted measures, including easing share buy-back rules, cutting security transaction taxes by half to 0.15 percent for six months, retaining a 3.5 percent limit on stock declines until Friday, and planning an economic stimulus package that includes subsidies for low-income households.

Following Taiwan authorities' intervention in the market on Sept 19, the TAIEX closed higher for three consecutive trading days. But this positive influence on the market did not last very long. The TAIEX started sliding on Sept 24, when the financial crisis overseas worsened and a slew of domestic bad news hit the market. Not withstanding the authorities' desperate efforts to buoy the market with various measures, the TAIEX slid by 19.11 percent between Sept 24 and last Friday.

Aside from the external financial crisis, some local events also turned into bad news for the market.

The first was the spread of the negative impact from imported tainted milk powder, which caused consumers to lose confidence in the administration's crisis-handling abilities.

Another was the string of typhoons. Taiwan usually endures well over a dozen typhoons each year.

The third lot of bad news came from a poll on Sept 28 indicating that public confidence in leader Ma had declined to a record low, suggesting negative opinion toward the administration's fickle policies. The survey gave a "Taiwan People's Satisfaction Index" (TPSI) of 37.5, including a political satisfaction index of 46.4 and an economic satisfaction index of 28.6. The TPSI ranges from 0-100, and indicates a positive evaluation when greater than 50 ("satisfied"), and negative when below 50 ("unsatisfied"). A TPSI below 25 is considered "gravely unsatisfied".

In such an atmosphere, as long as the external problems persist, we believe the Taiwan authorities will not be able to do much about the market sentiment, even if it continues to buy, or even if the regulatory agencies prohibit across-the-board short-selling whenever stock prices fall until the end of this year.

While systemic risk globally remains high and economic fundamentals are challenging, we expect a downward earnings revision across most sectors to lead the TAIEX's weakness in the short term.

Polaris Securities (Hong Kong) Ltd provided the article.

(HK Edition 10/23/2008 page3)