What to Buy in Korea and Taiwan -- Barron's Asia

By Credit Suisse

We find that Korea and Taiwan typically present the most effective play in Asia on US growth owing to (i) their relatively high US-destined export share of GDP at c5%, (ii) the high proportion of cyclical (export) index inclusions, both in excess of 70%, (iii) the significant revenue generation from US sales, and (iv) their strong performance correlation with US ISM--this metric forms part of our four factor econometric regression process for both countries.

We now equalise our recommended overweight stance on both Korea (from 30% overweight previously) and Taiwan (from neutral) to 15% above benchmark considering 10 attributes to establish their relative merits, of which we find one in favour of Korea, half a dozen in favour of Taiwan and three equally supportive of both markets.

In favour of Korea we find: (i) our econometric models suggest far greater upside for Korea relative to Taiwan; in support of Taiwan we note: (i) a more conducive growth environment for TSMC over Samsung Electronics; (ii) Taiwan offers superior profitability and value creation dynamics relative to Korea; (iii) strong earnings growth trajectory coupled with positive revisions favours Taiwan; (iv) the Taiwanese dollar ranks as the most robust EM currency on our FX scorecard; (v) lead indicators suggest a stronger short-term economic growth outlook for Taiwan; and (vi) valuations are tilted in favour of Taiwan versus historical relative average levels. Supportive for both Taiwan and Korea we identify: (i) accommodative monetary policy is indicative of positive equity market returns; (ii) real sector indicators suggest a relatively buoyant domestic environment; and (iii) positioning of EM dedicated equity funds provides scope for further allocation.

We screen for liquid Korean and Taiwanese names, which offer positive value creation, a 13/15E EPS CAGR greater than EM sector peers and are Outperform-rated by Credit Suisse analysts. This list includes: TSMC ( 2330.TT), Hon Hai Precision ( 2317.TT), SK Hynix (000660.KS), Mediatek ( 2454.TT), NHN (035420.KS), LG Chemical (051910.KS), Chinatrust Financial ( 2891.TT), Largan Precision ( 3008.TT), Catcher Technology ( 2474.TT) and Taiwan Cement ( 1101.TT).

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