Taiwan Strategy:Small upside to TAIEX in 2017

We expect moderate upside to the TAIEX in 2017 (index target of 9,500, or14x P/E / 1.7x P/B) driven by outperformance in memory, semiconductors,automation, auto electronics, financials and defensive non-tech stocks. Our2017 year-end NT$ forecast is NT$34/US$. We remain negative on the LCD,PC (albeit moderating declines), textile and footware sectors. We expect techto be driven by semiconductor growth acceleration (after 2 flattish years) anda weaker NT$ (helping all exporters). Key risks globally are potential demandshock brought on by weakening EM currencies and higher component costs.

Key risk for Taiwan specifically are politically focused (relationship withChina).

The TAIEX was flat in December (outperforming the region) with financialsoutperforming for the 2nd month in a row. The NT$ depreciated 1.2% and wasdown 2.9% for the 4Q16 (vs Yen down 15.4% and RMB down 4.1% in 4Q16).

Foreign flows were flattish in December after a strong June-August, flatSept/Oct and down November. For 2016, the Taiex was up 11.0%(outperforming the region) with tech strongest at +12.8%.

Over the past ten years, January returns of the TAIEX have averaged down2.1%, followed by up months in February, March, April, and May.