July-August Volatility Intensifies! Taiwan Stock Market Investment Strategy

Taiwan's stock market has rebounded sharply after a steep drop, with rising prices and increased volume pushing it back above the quarterly moving average, indicating a potential reversal. This rebound appears more than just a temporary bounce. However, with the index gaining over 2,000 points in a short period, profit-taking and pressure from trapped short sellers are inevitable. The critical test will be whether the market can stabilize around the quarterly line and near the 44,327-point level. If support holds, the index may retest the 45,785-point resistance.

Looking ahead to July and August, the market is likely to remain in a volatile range, alternating between sharp declines and rebounds. Investors should monitor foreign futures short positions, Middle East oil prices, interest rate expectations, and global deleveraging risks. Strategically, chasing rallies should be avoided. Maintain positions at around 50%, gradually building exposure during pullbacks in AI, TSMC supply chain, equipment, servers, and memory sectors. Use rebounds to reduce exposure to high-margin, overvalued, and fundamentally weakening stocks.

On July 17, Taiwan's stock market recorded its largest single-day point drop in history, triggering panic and raising concerns about whether the bull market had ended prematurely. However, a deeper analysis reveals that the plunge was not due to a sudden deterioration in corporate fundamentals, but rather a liquidity shock caused by the convergence of multiple short-term negative factors.

First, concerns over the return on investment (ROI) of global AI capital expenditures have emerged. Questions about whether cloud service providers' (CSPs) massive investments can translate into profits in the short term led to profit-taking in high-P/E AI-related stocks. Second, amid global deleveraging, international hedge funds simultaneously reduced positions to meet margin requirements, and highly liquid Taiwan stocks became a key market for foreign capital withdrawal, with TSMC and other large-cap stocks hit hardest. Third, margin calls and algorithmic trading created a chain reaction: once the index broke key support levels, margin liquidations and quantitative fund stop-losses triggered a cascade of selling, culminating in the record drop. In essence, this correction reflected market sentiment and liquidity pressures, not a systemic collapse in corporate earnings.

In such volatile conditions, what investors need to adjust is not market confidence, but their investment mindset. Every market downturn aggressively eliminates highly leveraged and overvalued assets. Sectors that surged in recent months—optical communications, CPO, memory, passive components, and certain substrate stocks—have seen their P/E ratios rise and margin usage increase, making them prime targets for institutional profit-taking. In contrast, companies with sustained earnings growth, stable cash flows, and reasonable valuations, though temporarily dragged down, retain their long-term competitiveness.

Therefore, rather than guessing the market bottom, investors should reassess portfolio quality, reduce exposure to high-P/E, high-leverage stocks lacking fundamental support, and maintain sufficient cash and flexibility as market positioning stabilizes. Mature investors don't chase prices at market peaks but calmly distinguish between emotional corrections and fundamental deterioration during panics. History shows that after major corrections, the next market leaders are often the same industries with sustained earnings growth and unchanged demand.

In the current AI supply chain, TSMC continues to expand its advanced process capex, and global cloud operators have not halted AI data center construction, indicating the long-term AI trend remains intact. Market capital is simply rotating from short-term overbought sectors to semiconductor equipment, advanced processes, and liquid cooling supply chains with reasonable valuations and high order visibility.

In fact, market downturns often present the best long-term investment opportunities. From a corporate value perspective, stock prices often follow a 'Smile Curve' cycle: during optimistic periods, sentiment inflates P/E ratios above fair value; during corrections, panic drives prices below intrinsic value; eventually, as earnings grow, prices realign with fundamentals. Thus, each sharp drop may represent the most attractive entry point for future long-term returns.

For investors unable to time the bottom precisely, using ETFs for dollar-cost averaging maximizes the benefits of buying low. Increasingly popular no-distribution reinvestment ETFs, such as the actively managed KGI Taiwan (00407A), retain component stock dividends within the fund for continuous reinvestment instead of paying cash to investors. During market corrections, the fund buys more quality stocks at lower prices, accumulating more shares. When the economic cycle recovers, not only do corporate earnings grow, but the number of shares held also increases, fully leveraging the compounding effect of 'buying more at lows, enjoying gains at highs.' Compared to receiving dividends and reinvesting manually, this approach reduces idle cash and transaction costs, better aligning with long-term capital appreciation.

For those seeking to reduce individual stock volatility while capturing market rebounds, actively managed ETFs are a valuable tool. From July 13 to 17, KGI 00407A fell only 7.94%, outperforming other major active ETFs: Uni 00981A (-9.95%), Allianz 00993A (-9.37%), Fubon 00405A (-9.99%), and Capital Group 00992A (-11.49%). 00407A's resilience stems from its active stock-picking strategy, which flexibly adjusts holdings based on market and industry trends, combined with dividend reinvestment that sustains compounding and maintains high capital efficiency during downturns.

Market crashes are ultimately part of the cycle—every panic passes. What separates investment performance is not who predicts the bottom, but who maintains discipline, executes proper asset allocation, and consistently builds positions through quality ETFs during pessimism. When the market returns to an uptrend, these low-cost holdings can become the foundation of the next wealth-building phase.

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The individual securities recommended and analyzed by our company have no improper financial interests. Past performance does not guarantee future profits. Investors should make independent judgments, carefully evaluate, and bear investment risks on their own.