Taiwan Strategy:What BREXIT means for the TAIEX

　　High volatility for capital markets, weaker NT$.

　　As the full impact from the UK exiting the EU plays out, capital marketvolatility and more end-demand uncertainty (especially in Europe) mayhamper upside to the TAIEX. A weaker NT$ (stronger US$), high US$exposure for many Taiwan companies, high dividend yields (sustainable), andgrowth should help offset the market uncertainty and lead to better buyingopportunities for several stocks.

　　Prefer growth stocks with high dividend yields (andreasonable valuations).

　　Tech: Positive impact from strong US$/weak NT$ (stronger Yen also positivefor industrial automation names) – negative impact due to volatility / potentialdemand implications. We continue to like the market leaders—who sharegood growth outlook and good dividend yields (sustainable with upside). Ourpreferred tech names are: foundry (TSMC), OSAT (ASE), memory OSAT(Powertech), and EMS (Hon Hai and Pegatron). Our least preferred pick withnegative growth rates, and higher Euro exposure is Acer.

　　Non-tech: Bicycle sector short-term negative impact due to Euro sales(currency) and some Yen costs. Contact lens (St. Shine) short-term positivefor Yen appreciation (still negative long-term due to intensifying competition).

　　Airlines – neutral impact – some UK / Europe exposure offset by higheroutbound demand due to weaker currency. Textile / home improvement /aerospace / petrochem / EPC – limited impact as most revenue in US$. Littleimpact to domestic sectors: telecom / consumer / e-commerce / logistics /cement / elevators / property. Our top picks (mainly defensive) focussed onhigh dividend yields, domestic, or US$ exposed: Basso, CTCI, AIDC, Kerry TJ.

　　Our least preferred remain (due to fundamentals / not Brexit impact): St.

　　Shine, Eclat, Makalot, Feng Tay and Yungtay.

　　Financials: We believe the likelihood for CBC’s rate cut is now higher afterFed’s more moderate tone and BREXIT. As a result, we expect furtherpressure on banks’ NIM while asset quality could continue to deteriorate. Lifeinsurers could find it difficult to invest because of a flattened yield curve, butthe widening credit spread in Europe could offset the impact, while those withstrong capitalization should be able to do bottom-fishing in both equity andfixed-income markets. Our top picks are E.Sun and CTBC, and our top sell isMega.

　　Taiwan – range-bound / tech over non-tech.

　　Our outlook for the Taiwan market remains unchanged since our November 3,2015 report; we expect the market to be range-bound (mostly tradingbetween 8000 – 9000 points) with a 2016 year-end target of 9000 (andNT$33.6 per US$). We also expect tech to outperform non-tech in Taiwan in2016 due to: 1) weak NT$, 2) 2015 tech underperformance, 3) lowervaluations / higher dividend yield, and 4) turned more negative on non-techsubsectors (especially textiles) from 4Q15).