Avoid panic due to high-end shocks, dual support from fundamentals and capital

■Yao Zonghong

In early October, Taiwanese stocks once rose to 50,000 points, but the sharp decline last week has once again raised concerns about a reversal from highs in the market. Observing this wave of corrections, it mainly reflects the market's concerns about rising inflation, expectations of interest rate hikes, and rising corporate financing costs. If we examine the fundamentals, profits of Taiwanese companies continue to be revised upward, and the mid- to long-term bullish pattern has not changed. Therefore, the recent sharp decline shows the market's amplified response to risk events such as interest rate increases, rather than a comprehensive reversal in corporate fundamentals.

Recently, Taiwan stocks have been under profit-taking pressure due to expectations of inflation and interest rate hikes. However, corporate fundamentals and profit outlooks have continued to be revised upwards, indicating that this sharp decline is mainly due to amplification of risk sentiment and not a reversal of fundamentals. (Central News Agency)

The Taiwan stock market is close to 50,000 points. The integer level will inevitably cause psychological pressure, especially when the market has risen significantly. Once a risk event occurs, it is easy to amplify profit-taking selling pressure. However, the fact that the Taiwan stock index is at the high end does not mean that Taiwan stocks have overvalued or are overvalued. Corporate profit performance is the key. If measured against corporate profit estimates for 2027, the current P/E ratio of Taiwanese stocks is about 16 times. Compared with long-term levels, Taiwanese stocks are not expensive. TSMC’s latest earnings announcement in its third quarter revenue and profits hit record highs, once again confirming that corporate profits are still supportive.

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Overselling of foreign capital does not mean retreat; Taiwan stocks have abundant capital momentum

From a financial perspective, although foreign capital has clearly oversold Taiwan stocks this year, with a cumulative oversold of approximately US$36.2 billion as of the end of September, the outside world may interpret foreign capital's trend towards Taiwan stocks as becoming more conservative. However, if the overall net inflow of foreign capital into Taiwan is examined, the net inflow exceeds US$100 billion. The direction of this data seems contradictory, but it reflects different fund behaviors.

The selling of stocks by foreign investors may be due to profit-taking or asset allocation considerations after a bullish increase, which is a relatively short-term capital adjustment. However, foreign funds continue to enter Taiwan for substantial investment, including joint ventures such as stocks, building factories, investing in convertible bonds, etc., which are biased toward medium- and long-term investment strategies. Therefore, foreign capital's overselling of Taiwan stocks cannot be equated with the complete withdrawal of funds from Taiwan.

In terms of domestic funds, ETFs have developed rapidly in recent years. Funds that originally stayed in fixed deposits, bonds and other assets have gradually entered the stock market. Domestic funds continue to take over, which also makes the market still have a certain degree of support even if it faces foreign investment adjustments. Therefore, recently, we have seen that financial, plastics and some transmission stocks have gradually gained favor from funds. Instead of interpreting it as the ebb of technology stocks, it is more suitable to think that funds have not left the market, but are rotating among different groups. Taiwan stocks have also gradually moved from AI to be bullish.

The main line of AI has not exited, investment focus turns to "specification upgrade"

In terms of profit growth, AI is still one of the most important investment themes at this stage, but the current investment logic will further shift to "specification upgrades." As the new generation of AI servers continues to evolve, components such as CPO/optical communications, power supply, cooling, PCB and memory all have upgrade needs. Among them, as the demand for AI data transmission increases rapidly, the development visibility of optical communications is relatively high. From upstream wafers and lasers to optical communication modules and test equipment, the improvement of technical thresholds and specifications has the opportunity to create new profit growth points and has room for long-term growth. Based on the broad market ranking and industry fundamentals, despite the recent volatility, we still view the outlook for Taiwan stocks positively from the fourth quarter of this year to the first quarter of 2027.

Say goodbye to the general rise, selected stocks are the key to victory

As the market moves from general gains to differentiation, the most important thing when investing in Taiwan stocks at this stage is not to predict when the index will rise, but to adjust investment methods. In the past period of time, the market has been generally rising, and there is a chance to make a profit by buying most stocks. However, in the future, the differentiation of individual stocks will be more obvious. Investors should reduce excessive leverage, accept normal stock price fluctuations, and return to corporate profits and industry trends. As long as the fundamentals do not reverse, it is still important to stay in the market. Only by targeting companies with high profit visibility, upgrading specifications, and long-term competitive advantages can we have a better chance of grasping the next stage of growth in Taiwanese stocks.

(The author is the head of the domestic investment department of Eastspring Investment Trust)

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