Taiwan stocks are expected to extend a 1-month high this week as foreign investors step up their buying and after the government raised its economic growth forecast for 2004.
But analysts said a significant rally is unlikely as concerns remain over weak earnings from smaller Taiwan companies and crude oil prices hover at high levels.
"It appears that investors' confidence has recovered somewhat and chances are high last week's gains could be sustained," said Kevin Lin, a fund manager at Shinkong Investment Trust.
After shuffling in a narrow range for 4 weeks, Taiwan's main TAIEX share index rose 4.3 percent to finish at 5,622.86 last week. Lin said the TAIEX could test 6,000 points soon.
The index has fallen 14 percent since late April, when the effects of China's economic-cooling measures started to hit share trading.
Foreign investors were big buyers last week. They bought a net T$3.92 billion (US $115 million) of Taiwan shares on Friday, accumulating about T$21.5 billion over the last 4 days.
Reflecting growing optimism, Merrill Lynch said Taiwan share prices offer reasonable investments for investors who had been concerned about a bleak outlook for the technology industry in the second half.
But investors may avoid BenQ Corp, the island's largest maker of computer equipment and mobile phones. The stock lost 1.99 percent on Friday after it warned of weak sales of flat-screen monitors weighing on the third quarter.
Foreign fund darlings like Taiwan Semiconductor Manufacturing Co and United Microelectronics Corp are solid long-term bets in anticipation that global fund managers would build up positions before the MSCI upgrades to Taiwan's weighting become effective.
Morgan Stanley Capital International (MSCI) has said Taiwan stocks would be weighted at 75 percent capitalisation beginning November 30, up from the current 55 percent. Local shares would be fully weighted in mid-2005.