Year-end index target at 15,000. Taiwan equity market’s performance in 2020 largely tracked consensus earnings growth expectation of around 15%. We believe performance in 2021 will be partly supported  by a similar earnings growth pace of 14%, though index upside could be capped if we see some rotation out of tech, which accounted for 70% of the index. Meanwhile, valuation should sustain above cycle average, bolstered by low rates, liquidity and above cycle ROE. Therefore, we set year-end 2021 index target at 15,000.

Lesser drag in 2020, smaller rebound in 2021. Taiwan is one of the very few markets in Asia expected to see positive GDP and EPS growth in 2020, though this has also set up Taiwan for a smaller post-COVID-19 rebound. However, the market is expected to see another 14% profit growth in 2021, driven by global growth, with sales growth accelerating to 5% from 3%, which is consistent with improving Taiwan GDP growth to 4% from 2.5%. Meanwhile, we expect earnings revisions to stay slightly positive on global PMI support and tech demand strength sustaining into early-2021. On policy, 2021 will likely be a muted year, though Taiwan should still benefit from the residual effect of on-shoring investment and capital repatriation. Hence, with a weak USD outlook, TWD may see some appreciation.

Broad-based recovery and shift within tech growth. While we expect Taiwan to see a similar earnings growth pace in 2021 as in 2020, the growth mix will likely differ considerably. A cyclical earnings rebound in 2021 with moderating but still resilient tech profit growth should result in an apparent broadening of earnings growth for the market. Also within tech, we expect a shift in earnings growth from semi (partly off a high 2020 base) to other parts of tech, as demand strength shifts from WFH to other core themes (5G, cloud and data-centre). Importantly, we believe, given QFII’s extreme overweight in upstream tech (2.6 SD above the long-term trend) it may leave plenty of room for rotation in 2021 as EPS growth broadens notably to other sectors in the market.

Stock calls. Our top picks for 2021 are Mediatek, TSMC, Largan, Quanta, and Accton within tech. In non-tech, we like Yuanta, Nien Made, Merida, and CTBC Holding. Our least preferred names are Makalot, First FHC, Asustek, and CHT.