Fubon Financial

The index's upward movement must rely on the leadership of electronics, and stock selection should adopt the "Fubon ANGELS" strategy

U.S. President Trump has announced new tariff measures, causing significant turmoil in the global stock, currency, and bond markets during the first half of the year, with Taiwan stock market experiencing a drop of over 6,000 points at one point. Looking ahead to the second half of 2025, Yih Kuang Chen, Chairman of Fubon Asset Management, presents the topic "A Capital Market Battle Between Bulls and Bears: Voting Machines vs. Weighing Machines," indicating that Trump's policies will continue to influence market trends. This year, the profit forecast for Taiwan stock market has been revised down to NT$4.3 trillion, reflecting a year-on-year increase of 6.5%. For the index to rise, the key will be for the electronics sector to lead, followed by the financial sector. Once the tariff crisis is resolved and global trade returns to normal, traditional industry leaders may rebound from low levels. Overall, in the third quarter, due to the impact of dividend distributions, foreign investment is expected to be on the selling side, resulting in a low probability of market increases, while the fourth quarter may benefit from optimistic earnings prospects, with a potential peak of 24,000.

In terms of stock selection strategies for the Taiwan stock market, Yih Kuang Chen proposes the adoption of the 'Fubon ANGELS' strategy, which aims at the AI supply chain (AI demand, robotics), NTD appreciation (focusing on sectors like aviation, tourism, food industry, and asset themes), government policies (which facilitate industrial upgrades, such as the drone industry, electronic demand, and the urgent requirement for net-zero carbon green energy), ETFs (including high dividend and market capitalization types), low P/E (value investing), and themes associated with satellites (low Earth orbit satellites).

The tariff measures implemented during Trump's second term have led to global stock and bond market returns trailing behind gold through May 2025. The outlook for corporate earnings has been downgraded due to factors such as tariffs and elevated interest rates, resulting in valuations climbing to relatively high points, thereby constraining the room for price increase. As the US dollar weakens and drops below the US$100 threshold, the market's demand for gold has surged. Additionally, the extension of Trump's tariff conflict to nations outside of China may hinder trade expansion.

The trade growth is constrained due to the tariff war, and Trump's tax cuts are expected to increase the fiscal deficit and the pressure of debt

Yih Kuang Chen indicated that among the major stock markets, Taiwan and the United States have the highest Buffett indicators. The Taiwan stock market benefits from a significant weight of high-growth technology stocks, while the U.S. market enjoys advantages in both branding and technology. In 2024, the Buffett indicator for the Taiwan stock market has increased by 66% compared to the average of the previous five years, while the U.S. and Japan stock markets have risen by 27% and 26%, respectively. Conversely, the China stock market remains below the average of the past five years, thus presenting an attractive opportunity for value investment. In April, global stock markets experienced a sharp decline due to the impact of reciprocal tariffs, but rebounded quickly after mid-month. Most stock markets have seen their price-to-book ratios (PBR) recover to levels above the 10-year average, with only the CSI 300 and KOSPI remaining lower. The rebound in stock prices is resulting in a reduction of the yield rates for both U.S. and Taiwan stock markets.

Observing the relationship between national debt and GDP performance, Taiwan's debt constitutes only 26% of its GDP, significantly lower than that of developed economies; however, it does have potential liabilities such as public sector pension obligations. In contrast, Japan's government debt accounts for 237% of its GDP, making it the highest among major nations. The United States, due to pandemic relief measures, saw its debt-to-GDP ratio reach 132% in 2020; although it is projected to decrease to 121% in 2024, this figure still represents a 14% increase compared to the average of the five years preceding the pandemic. Furthermore, with Trump advocating for further tax cuts, it is anticipated that this will exacerbate fiscal deficits and increase debt pressures.

According to Yih Kuang Chen's analysis, Taiwan and China mainly focus on original equipment manufacturer, which leads to their gross margins lagging behind those of major global stock markets. Nevertheless, Taiwan Businessmen are more adept at managing costs, enabling their net profit margins to align with those of European companies. It is anticipated that by 2025, the net profit margin of Taiwan stock market could potentially reach 10%.

Based on historical experience, the Fed typically pauses interest rate hikes for an average of about 10 months before initiating a rate cut. During these pauses, the S&P 500 has seen an average increase of 19%. In 2025, due to uncertainties surrounding tariffs, the Fed has halted rate cuts, leading to a significant rebound in the U.S. stock market. The likelihood of a negative impact from rate cuts has diminished, and it is advisable to monitor whether Trump intentionally suppresses stock indices in the third quarter to pressure Powell into lowering rates. However, from 2009 to 2025, the yield on U.S. 10-year Treasury bonds has correlated with the S&P 500, suggesting that the price-to-earnings ratio (PER) may not necessarily compress during periods of high interest rates. This current rebound in the U.S. stock market is projected to have a PER that exceeds the yield when it is in the 4%-4.5% range, with an average estimated PER of 20.4 times, which is only 3% away from its peak. Consequently, the investment value is limited, and the index's potential growth must rely on earnings adjustments.

Analysis of the "12 rates" trends: Taiwan's GDP exhibits high performance early in the year followed by a decline

Yih Kuang Chen has proposed that the market can be analyzed by observing the '12 rates'. This includes the manufacturing Purchasing Managers' Index (PMI), which serves as a 'leading indicator' that predicts challenges in achieving the threshold of prosperity and recession. The Non-Manufacturing Index (NMI) in Taiwan shows a deceleration in its expansion rate. The 'mid-indicator' comprises the Consumer Price Index (CPI) and the Producer Price Index (PPI), where the current indices are stable, but the gap is increasing, with tariffs raising concerns about inflation in the United States. Moreover, the 'corporate thermometer' is indicated by the gross profit margin and operating profit margin. Since large companies in Taiwan and China are predominantly manufacturing-focused, their gross profit margins are lower than those of publicly traded companies in Europe and the United States that prioritize branding and design. Nevertheless, in terms of operating profit, the Taiwan stock market has experienced a recovery in the first quarter of this year, reaching levels close to a ten-year peak.

The "economic report card" reflects the Gross Domestic Product (GDP) and unemployment rate. In the first quarter, the GDP of the United States experienced a slight contraction of 0.2%, while the unemployment rate remained stable at 4.2%. In contrast, both China and Taiwan reported GDP growth rates exceeding 5%. However, due to anticipated demand occurring earlier in the second half of the year, economic growth is expected to show a pattern of high performance followed by a decline, with foreign trade expected to slow down in the latter half of the year. The "economic showcase" encompasses corporate revenue and earnings growth rates, as well as dividend yields. It is estimated that U.S. corporate earnings will initially decline before rising. According to a survey conducted by LSEG analysts at the end of May, the projected earnings growth rate for S&P 500 companies has been revised down to 8.3% for this year. Only the technology, communication services, and healthcare sectors are anticipated to achieve double-digit earnings growth, with a forecasted recovery to 16.7% by 2026. Conservative investors are focusing on high dividend yield stocks as their primary investment strategy. Although stock price rebounds have compressed dividend yields, expectations remain that French, China, and Taiwan stock markets will still exceed 2.5%. Globally, central banks are generally adopting a more accommodative monetary policy, and government bond yields are exhibiting a range-bound pattern, as the market observes the impact of tariffs and awaits a potential interest rate cut from the Federal Reserve.

By 2029, the anticipated scale of AI application demand is projected to be US$1.52 trillion

In the arena of US-China competition, Yih Kuang Chen is optimistic about the potential of AI applications. He points out that technological innovation has consistently served as a vital catalyst for stock prices. A retrospective examination of the Nasdaq's performance over the past four decades indicates that each time an innovative technology product is introduced to the market, it tends to generate a new stock market leader and invigorate the stock market. This phenomenon includes significant instances such as Wintel in the 1990s, Google in the 2000s, Apple in 2006, Tesla in 2012, and Nvidia in 2022. Technologies like personal computers, the internet, mobile devices, and electric vehicles have all reached the consumer market, and the next phase may involve the practical application of edge AI. The emergence of generative AI has accelerated growth in the AI market, which now encompasses applications in cloud training, autonomous driving, robotics, and healthcare. The market size was approximately US$450 billion in 2022 and is projected to grow to US$1.52 trillion by 2029, with a compound annual growth rate (CAGR) of 22.3%.

In the capital market performance segment, the market capitalization of technology stocks has significantly increased. An analysis of the S&P 500 reveals that technology and financial stocks hold the highest weightings, with the weight of technology stocks rising from 20% a decade ago to over 30% currently. Communication services account for nearly 10%, while financial stocks range from 10% to 17%. In contrast, the CSI 300 has the highest weighting in financial stocks, which has shown a decreasing trend over the past ten years, currently standing at around 25%. The weighting of industrial stocks is between 11% and 17%, and the weighting of information technology stocks has risen from below 10% a decade ago to 15%. Similarly, the Taiwan stock market also has the highest weighting in electronic stocks, which has increased by 18 % over the past decade, reaching 69%, while the weighting of traditional industries has decreased from 36% to 20%, and financial stocks remain at 10%.

This year, the profit growth of electronic stocks is estimated to be 20%, while traditional industry and financial stocks are experiencing a decline of over 10%

Yih Kuang Chen noted that prior to 2003, the Taiwan stock market was primarily driven by market leaders, resulting in a lower correlation between index performance and profitability; however, after the opening of foreign investment in the Taiwan stock market in 2003, valuation concepts such as PER and PBR were gradually introduced. Additionally, the increasing proportion of institutional trading has led to a synchronized trend between stock performance and profitability. In the past two years, the Taiwan stock market has surpassed the 20,000-point mark, largely benefiting from the AI trend, which has significantly boosted supply chain profits, as well as Taiwan's pivotal position in the AI industry.

Regarding funding and market conditions, there has been a resurgence in excess savings, with projections for 2025 indicating that they will exceed NT$4 trillion, marking a new high. In the last three years, the net buying amount by investment trusts has been considerable, with the total value of all ETFs reaching NT$6.4 trillion, representing about 8.5% of the total market capitalization of listed companies. The ongoing popularity of ETFs is expected to continue, potentially serving as a significant catalyst for the Taiwan stock market. Since April this year, the NTD has strengthened, and foreign investors transitioned from net selling to net buying in May, suggesting that the appreciation of the NTD could draw in foreign capital. Furthermore, after a substantial decrease in the margin financing balance over the years, the index has mostly risen, and corporate buybacks are likely to enhance market stability.

In summary, Yih Kuang Chen noted that the Taiwan stock market's profits in the first quarter surpassed expectations due to the reactions to reciprocal tariffs and exchange rate impacts. Fubon had even raised its profit forecast for 2025 to NT$4.74 trillion. However, from the second quarter onward, the repercussions of Trump's tariff war began to affect the market. Taking into account the effects of the tariff conflict and adverse exchange rate conditions, the profit forecast for the Taiwan stock market has been revised down to NT$4.3 trillion, which represents a 6.5% year-on-year growth. While the profit growth rate for electronic stocks has been slightly constrained, it continues to show a 20.3% increase, supported by advancements in AI and semiconductors. Traditional industries are facing a 13.8% decline in annual profits, primarily due to shrinking earnings in the shipping sector. Financial stocks are experiencing significant fluctuations across the stock, currency, and bond markets, and with last year's high base effect, an annual profit reduction of 14.3% is anticipated.