Taiwan stocks, trading at a 40-month high, are expected to muscle past profit-taking pressure this week as dormant technology shares regain momentum on upbeat economic data and pre-election optimism.
"Money is clearly coming back to the electronics sector and there is obviously a bullish mood in the market," said Masterlink Securities analyst Justin Lin.
"Even though the index looks a little overheated in the short term, it is hard to see the market failing to continue its up-trend."
The benchmark TAIEX share index rose 1.78 percent in the past week to close at 6,665.54 on Friday, its highest finish since September 27, 2000.
After the market closed, the government issued strong fourth-quarter economic figures which confirmed investor hopes that domestic demand is beginning to power economic growth alongside the export sector.
While investors are expected to cash in gains in the banking and insurance index, which has risen 20 percent since the year began, buying in the heavyweight technology sector is expected to support the market, analysts said.
Tech stocks began to show signs of life late last week after the electronics sub-index had mostly puttered in quiet sideways trade since the beginning of 2004.
Investors had let the tech sector cool off after a sharp rally in the last six months of 2003 pushed valuations to lofty highs.
"Electronics stocks expected to issue good dividends after a strong 2003 could be a focus of attention," said Lin.
Even banking shares may have limited downside after the government raised on Friday its 2004 economic growth forecast to 4.7 percent from 4.1 percent.
It said Taiwan's fourth-quarter gross domestic product had grown a surprisingly strong 5.2 percent from the year-ago period.
Investors also expect state pension and insurance funds to support the market before the presidential elections on March 20, keeping a cap on the TAIEX's downside.
But analysts sounded a note of caution as stocks bought on margin increased by 3.6 percent last week, amid heavy participation from individual investors - a sign that the market could be slightly overheated.
A 0.43 percent fall in the Dow Jones Industrial Average and a 0.39 percent drop in the Nasdaq Composite on Friday could also weigh on the Taiwan market's Monday open.
"The market looks a little messy at the moment, but everyone expects the index to hit 6,800 or more before the election, and that is only one month away," said Maggie Chien, investment consultant at Capital Investment Management.
"If we have a little pullback, 6,500 points would be a good place to re-enter the market," she said.
Smaller-capitalisation display screen makers such as Chunghwa Picture Tube and Hannstar Display have been catching up to valuations in larger peers such as AU Optronics
Fund managers looking for tech bargains have also snapped up shares in compact disc manufacturers after the chairman of CMC Magnetics said in a television interview on Friday he expected the firm to earn more than T$4.0 per share this year.
Heavy daily turnover of more than T$160 billion per day is likely to boost fee income for brokerage houses such as Polaris Securities.
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